Investing instead of buying a flat or house

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  • Johnjdc
    Johnjdc Posts: 356 Forumite
    First Anniversary Name Dropper First Post
    The main reasons to buy a house rather than invest are:

    a) Leverage: The bank will let you buy a £500k asset with £50k of money down at a pretty reasonable interest rate, as long as the asset is a house. Go to a bank asking to buy £500k of shares and corporate bonds with £50k down and see what they say. That means if the house price goes up 10% you've doubled your money. Not so if you just bought £50k of shares.
    b) Risk aversion: House prices sometimes "crash" by 20%, though in the long-term they've tended to more than keep up with inflation. Shares on the other hand can easily go up 100% or down 50% in a matter of months.
    c) Security of tenure: Usually if you own a home, you are going to be able to stay in it for as long as you choose to do so, not so if you rent.  You are also locking in today's price, for better or worse.
    d) Tax advantages: Effectively if you invest and pay rent with the yield from the investment, you're likely to be paying rent out of your after-tax income. Whereas if you buy the house, you don't owe any tax on the "rent you aren't paying". Though you may have out of pocket expenses like maintenance and insurance.

    On the other hand if none of those apply - i.e. you already have the cash, are happy to take risks, don't mind moving or may actively need to move, and are good at sheltering your investments from tax, then investing £500k in stocks, bonds, startups, etc, is likely to make you much much richer over the course of 20-30 years than investing it in a house.

    To take an example:

    £50k invested in a house in 1985 would be worth about £500k today.
    £50k invested in large cap US stocks in 1985 would be worth around £1.2m today
    £50k invested in US tech stockes in 1985 would be worth around £2m today
    £50k invested in Berkshire Hathaway in 1985 would be worth around £6.7m today

    I think you actually need to increase the last three numbers to reflect gains from the pound weaking against the dollar, too!

    On the other hand, you might have invested in something that went to 0, of course - houses don't usually do that.

    Even if you do decide a house is better, it may still be worth timing the market, or waiting for other reasons - if you can get 5% without taking much risk on your cash for two years, and expect house prices to be flat or falling in that time, there's not necessarily a rush to get in the market - especially if your career might take you somewhere else in a small number of years.

    If you have the cash without a mortgage, buying at auction during a recession is also not the worst idea, but not something to rush into.
  • Johnjdc said:
    The main reasons to buy a house rather than invest are:

    a) Leverage: The bank will let you buy a £500k asset with £50k of money down at a pretty reasonable interest rate, as long as the asset is a house. Go to a bank asking to buy £500k of shares and corporate bonds with £50k down and see what they say. That means if the house price goes up 10% you've doubled your money. Not so if you just bought £50k of shares.
    b) Risk aversion: House prices sometimes "crash" by 20%, though in the long-term they've tended to more than keep up with inflation. Shares on the other hand can easily go up 100% or down 50% in a matter of months.
    c) Security of tenure: Usually if you own a home, you are going to be able to stay in it for as long as you choose to do so, not so if you rent.  You are also locking in today's price, for better or worse.
    d) Tax advantages: Effectively if you invest and pay rent with the yield from the investment, you're likely to be paying rent out of your after-tax income. Whereas if you buy the house, you don't owe any tax on the "rent you aren't paying". Though you may have out of pocket expenses like maintenance and insurance.

    On the other hand if none of those apply - i.e. you already have the cash, are happy to take risks, don't mind moving or may actively need to move, and are good at sheltering your investments from tax, then investing £500k in stocks, bonds, startups, etc, is likely to make you much much richer over the course of 20-30 years than investing it in a house.

    To take an example:

    £50k invested in a house in 1985 would be worth about £500k today.
    £50k invested in large cap US stocks in 1985 would be worth around £1.2m today
    £50k invested in US tech stockes in 1985 would be worth around £2m today
    £50k invested in Berkshire Hathaway in 1985 would be worth around £6.7m today

    I think you actually need to increase the last three numbers to reflect gains from the pound weaking against the dollar, too!

    On the other hand, you might have invested in something that went to 0, of course - houses don't usually do that.

    Even if you do decide a house is better, it may still be worth timing the market, or waiting for other reasons - if you can get 5% without taking much risk on your cash for two years, and expect house prices to be flat or falling in that time, there's not necessarily a rush to get in the market - especially if your career might take you somewhere else in a small number of years.

    If you have the cash without a mortgage, buying at auction during a recession is also not the worst idea, but not something to rush into.
    £50K in 1985 is equivalent to £186,000 in today's money  :(
  • Johnjdc
    Johnjdc Posts: 356 Forumite
    First Anniversary Name Dropper First Post
    Johnjdc said:
    The main reasons to buy a house rather than invest are:

    a) Leverage: The bank will let you buy a £500k asset with £50k of money down at a pretty reasonable interest rate, as long as the asset is a house. Go to a bank asking to buy £500k of shares and corporate bonds with £50k down and see what they say. That means if the house price goes up 10% you've doubled your money. Not so if you just bought £50k of shares.
    b) Risk aversion: House prices sometimes "crash" by 20%, though in the long-term they've tended to more than keep up with inflation. Shares on the other hand can easily go up 100% or down 50% in a matter of months.
    c) Security of tenure: Usually if you own a home, you are going to be able to stay in it for as long as you choose to do so, not so if you rent.  You are also locking in today's price, for better or worse.
    d) Tax advantages: Effectively if you invest and pay rent with the yield from the investment, you're likely to be paying rent out of your after-tax income. Whereas if you buy the house, you don't owe any tax on the "rent you aren't paying". Though you may have out of pocket expenses like maintenance and insurance.

    On the other hand if none of those apply - i.e. you already have the cash, are happy to take risks, don't mind moving or may actively need to move, and are good at sheltering your investments from tax, then investing £500k in stocks, bonds, startups, etc, is likely to make you much much richer over the course of 20-30 years than investing it in a house.

    To take an example:

    £50k invested in a house in 1985 would be worth about £500k today.
    £50k invested in large cap US stocks in 1985 would be worth around £1.2m today
    £50k invested in US tech stockes in 1985 would be worth around £2m today
    £50k invested in Berkshire Hathaway in 1985 would be worth around £6.7m today

    I think you actually need to increase the last three numbers to reflect gains from the pound weaking against the dollar, too!

    On the other hand, you might have invested in something that went to 0, of course - houses don't usually do that.

    Even if you do decide a house is better, it may still be worth timing the market, or waiting for other reasons - if you can get 5% without taking much risk on your cash for two years, and expect house prices to be flat or falling in that time, there's not necessarily a rush to get in the market - especially if your career might take you somewhere else in a small number of years.

    If you have the cash without a mortgage, buying at auction during a recession is also not the worst idea, but not something to rush into.
    £50K in 1985 is equivalent to £186,000 in today's money  :(

    Well, yes, that's a different issue. All financial assets have risen by a huge amount more than wages and general prices, so shares, houses, whatever you're buying, you're going to get less for your money. The good news is that for a lot of that time wages performed a bit better than inflation so while it's equivalent to £186k in money it's equivalent to maybe £350k in earnings.
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