Assuming an equal start without any downpayment at all, you have to be Oracle of Omaha great with your stock investment portfolio to beat the return on investment inherent with housing since the difference between mortgage and rent in most markets will only give the renter a couple hundred dollars a month to invest.
In the end, the owner will likely recoup every dollar of principle they pay in the long term, while the renter has to find an investment opportunity that will not only return all of their loss (the rent they've thrown away) but then beat the increased valuation the housing market will provide the owner.
What about stocks? Stocks are a medium to high risk investment with no guaranteed return on investment. It's actually pretty hard to make an educated guess what the return would be. But we can give it a go. According to this analysis,
the nominal compound annual return of the Dow from
year-end 1900 to year-end 2011, excluding dividends,
was 4.75%.
That's actually pretty good and annihilates current CD rates (which hover around 2% for 5 year jumbos). Let's run these numbers. According to my handy compound interest calculator, with a current principle of $0.00 (starting from scratch), adding $2,400/yr over 30 years, compounded annually at 4.75% gives me about $160,000. That's actually pretty close to my inflationary upper bound calculated earlier!
But that's also an upper bound.
However, the real compound annual growth was only
1.6%. That is, when we use constant dollars, we
discover that the purchasing power has only
increased 1.6% per year.
So we should actually run the numbers with 1.6% we end up with about $93,000. That's great, but even with the miracle of compound interest, I'm not putting a dent in that $1.6 million.
Let's get crazy, let's say I'm a fantastic stock picker and I can beat all this and I'm making about 12% per year. Running the compound interest calculator, I get $650,000. That's pretty amazing, but I still have about a million dollars to go to break even. I actually have to hit 16.5% every year, for 30 years, to break even.
This site lets us run another kind of calculation, the average rate of return for the S&P 500 over some date range. I picked the last 30 years and got 12.67% not adjusted for inflation and only 9.57% adjusted. Professional fund managers struggle to beat the S&P. So realistically, you aren't going to either over the long run.
In the end, the owner will likely recoup every dollar of principle they pay in the long term, while the renter has to find an investment opportunity that will not only return all of their loss (the rent they've thrown away) but then beat the increased valuation the housing market will provide the owner.
From here - http://assayviaessay.blogspot.com/2014/04/rent-or-buy.html
What about stocks? Stocks are a medium to high risk investment with no guaranteed return on investment. It's actually pretty hard to make an educated guess what the return would be. But we can give it a go. According to this analysis,
That's actually pretty good and annihilates current CD rates (which hover around 2% for 5 year jumbos). Let's run these numbers. According to my handy compound interest calculator, with a current principle of $0.00 (starting from scratch), adding $2,400/yr over 30 years, compounded annually at 4.75% gives me about $160,000. That's actually pretty close to my inflationary upper bound calculated earlier!But that's also an upper bound.
So we should actually run the numbers with 1.6% we end up with about $93,000. That's great, but even with the miracle of compound interest, I'm not putting a dent in that $1.6 million.Let's get crazy, let's say I'm a fantastic stock picker and I can beat all this and I'm making about 12% per year. Running the compound interest calculator, I get $650,000. That's pretty amazing, but I still have about a million dollars to go to break even. I actually have to hit 16.5% every year, for 30 years, to break even.
This site lets us run another kind of calculation, the average rate of return for the S&P 500 over some date range. I picked the last 30 years and got 12.67% not adjusted for inflation and only 9.57% adjusted. Professional fund managers struggle to beat the S&P. So realistically, you aren't going to either over the long run.