Should you Buy a House or Invest in a Brokerage?

This week in money 6/23-6/29

I have been making a real effort to try and get better with money at every stage of life. I am starting to really get great money habits and just have a set-it-and-forget-it lifestyle. Starting to move up every money milestone tracker and it doesn’t matter which website I look. Most are beginning emergency fund, match, fully funded emergency fund, ROTH IRA HSA max, max out 401(k), hyperaccumulation by increasing savings rate, pre-paying future expenses like college, and paying off low-interest debt like a home. 

It feels good at a lower income to be on step 6. I am like a million miles away from completing step 6 but still on it! A great foundation for my present and future at the moment. Killing debt has been probably my biggest blessing because my money is mine. I am at about 30% gross income savings rate which is great for my income. If I ever eventually maybe increase my income the amount of money saved will begin to get very exciting. Embarrassingly enough a lot of my income was going to a savings account which far exceeded 6 months of expenses but after careful thought, maybe not too much care I dropped it down to a little over three months. And three months of expensive months not like an emergency where I would cut down everything and try to coast for three months so it will be more like five months if things happen. I still feel very light on cash, but the math is fairly easy. Almost 4.5% in a high yield or possibly 8-12% in the market. I want to say math wins but my emotional limit to risk isn’t very high and I feel exposed especially before I was running at a cash for over a year. Also, I do have a break glass in extreme emergency in my Roth IRA contributions and I do mean EXTREME emergency. EXTREME. Moving on to the question that I received on another person’s finances which has a lot to do with risk. 

Buy a house with 20% down or put 3% down and put 17% in the market. 

It has excited me, what a question to answer. I am going to try to be as objective as possible because I feel a type of way but math>emotions. The sign flipped a few years ago and I lost ALOT of money to. Furthermore, goals>emotions as long as you can afford the goals. Math>goals>emotions should probably be the best way to go about it. It is possible to get more gains in the market but if a home purchase is your goal, then you can just purchase the home if the math works out for you to afford it. The national appreciation rate from 1987 through July 2023 is 4.8% per year according to Case-Shiller. Housing is one of the largest assets that most people will ever own and it is tangible, but mathematically it doesn’t have the same growth as the market. In the last 5 years of S&P 500 it has gone up around 17% per year. A good portfolio return should be about 8-12% if we go conservative with an 8% gain and round up to 5% for home appreciation the market still wins mathematically. The market can go down and up which is a stressful time emotionally but if you look out over a long period of time the math does work. 

When you take money out of a brokerage, they will be taxed but these accounts allow for flexibility, unlike a retirement vehicle like an IRA or 401(k). You can take money without a penalty, but you do have to pay long-term capital gains tax at a rate of 15% you also have to pay taxes on dividend income even if you reinvest them that is considered taxable income you must report. There is a thing as short-term capital gains which will be taxed at your tax rate for your income. 

This is the main reason why maxing out retirement vehicles are high priority due to the tax advantages you get in each. Traditional 401(k) is pre-tax contributions. Roth is post-tax. There is also a capital gains tax deduction for selling a house so must take that into account.

So, here’s some math on a $350,000 house with a $70,000 down payment and putting in $2500 a month at a 7% which is standard this year, hoping it goes down soon. In 30 years, the house will be worth 1.5 million dollars but the rough part about a house is you can’t sell portions of it like your assets in the stock market. 

Putting $70,000 into the stock market while adding $1,000 a month with a 10% annual return is $726,244 in 15 years. 1.272 million dollars in 20 years. 2.1 million dollars in 25 years. It flies past the home value in between the 20-25 year mark which is awesome. In 30 years, you will almost have 3.65 million dollars sitting in your brokerage. In 35 years, you pass the 6 million mark. The miracle of compound interest. 

These are just simple compound interest calculator calculations and there are some different risks in the stock market. The stock market could tank, and you might not be able to get a 10% annual return over the span of years. 

Same thing with houses, there are risks. Your air conditioning unit blows out and you have to fix that, can’t just hold your money even if problems occur like the stock market risks. 

It is interesting because the math swings the brokerage route rather easy. A perfect scenario would be to diversify but the maximizing route is going to be brokerage and depending on the size of the family, your goals, and the added fees for maintenance it could be the best route at the moment. Like with most goals of personal finance on the higher level of personal finance the math of maximization is less important than your wants. If you want a house, it is still a great option, and you definitely should do it. Just tried to give a look at both options and you will make the decision that works best for your family.