Buying a House VS. Investing In the S&P 500 (Which Is Better?)

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2:22For more information on APY rates, MyPay, SpotMe, and travel perks, go to chime.com slash disclosures. On this episode of the Personal Finance Podcast, we have a big episode in the Versus series. We are going to do the S &P 500 versus buying a house.

2:44What's up, everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co. And today on the Personal Finance Podcast, we're going to talk about the S &P 500 versus buying a house. If you guys have any questions, make sure you join the MasterMoney newsletter by going to MasterMoney.co slash newsletter. And don't forget to follow us on Spotify, YouTube, Apple Podcasts, or whatever podcast player you love listening to this podcast on. If you want to help out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player.

3:17Now today, we're going to be diving into a huge showdown between the S &P 500 versus buying a house. Now when we say buying a house in this episode, we are talking about buying your personal residence and what happens during that specific situation. So we're going to go all the way back to 1970. And if you bought a house in 1970, you would have a 400 % rate of return all the way up to at the point in time I'm recording this, which is right before 2026. If you put that same amount of money into the S &P 500, here is the crazy part. You would have a 7 ,000 % rate of return. And a lot of people out there think that buying a house is a fantastic investment.

3:59And we're going to dive into the details today and the math behind why I am going to argue you, that is not the case. In fact, I would say buying a house is a lifestyle decision more so than it is actually an investment decision. Now, there are some people out there who have done a tremendous job when they bought a house, and they've got some tremendous benefit out of that. We're going to talk about some of those benefits in this episode, but a lot of other folks out there, if you look at the comparison here between the S &P 500 and what is going on with buying a house, you will see a dramatic difference in the rate of return.

4:32Now, the reason why we're doing this episode is there is a chart on Twitter going viral. We'll put it on the screen right now that shows you the difference between the S &P 500 and buying a house and what those returns are. And when you look at this, you're going to see this is not a typo. A house has returned four times, whereas the S &P 500 has returned 70 times your money in the same exact timeframe. Now that's before we even talk about property taxes and insurance and HOA fees and maintenance fees and all the other fees associated with owning a house. And owning a house has tons of hidden expenses that most people don't think about.

5:08We'll dive into all of those today. We're going to talk about what homes actually appreciate after inflation at all costs. We're going to go through some case studies and see what happens if you bought a$300 ,000 home, a$500 ,000 home, and what happens if even if you bought a million dollar home and the difference between those two, and when buying still makes sense versus renting, plus when investing wins in those situations. And we're going to talk about how to calculate true cost of ownership by using my total cost of ownership calculator, which you can get down below in the show notes if you're interested in getting that right now.

5:38We have a calculator that's going to help you do that. So this is one of those eye-opening episodes for a lot of folks out there once they hear some of this data and they hear some of this information. So without further ado, if that's something you're into, let's get into it. So part one is I want to talk about the 100-year-old truth when it comes to buying a home versus investing your dollars into the market. And what most people don't realize is that when you buy a house, there are so many other costs associated with owning a home that you need to understand that this is not an investment. When you go out and buy a house, this is a lifestyle decision.

6:12You're going and buying a home because you want to live in a specific location and you want to stay in that location for a longer period of time. There are way too many people out there who do not understand the math behind this and they feel as though they need to go out and buy a house. Otherwise, they're going to fall behind with their finances. That is absolutely not true. And the math is going to show you right now why that is not true. So Robert Schiller has this time frame between 1890 and 2024, where real appreciation, which is inflation adjusted for a home. If you bought yourself a home over the course of the last 100 years, you would see a 0.6 per year appreciation.

6:49That is the real appreciation after inflation. Now, the nominal appreciation, which is before inflation, is about 3.5 % every single year. My friends, you get more than that currently in a high-yield savings account in most situations at the time I'm recording this. And so this is a really eye-opening thing to see because inflation is also eating away at your returns when you live in that home. Now, one big caveat I want most people to know, because when we bring this up, sometimes they will say, what about investing in real estate and getting cashflow, all those different things? That's not what we're talking about here.

7:20We're talking about the home that you currently live in. That is your real rate of appreciation over the course of the last 100 years. Now, let's be very clear because inflation makes home prices go up in dollar terms. And so we wanna understand this, and inflation is not a return. And so overall, I think we need to look at this and think about what is going to happen to home prices over the course of the next 50 to 100 years. Nobody has a crystal ball. Nobody can predict that. But if history serves us any types of lessons whatsoever, we know that it's probably going to be very similar to the last hundred years.

7:56And if that is the case where we have ups, we have downs, we have supply issues, we have demand issues, there are going to be all these other issues that will come up in the housing market. And we need to know the housing market is a slow moving inflation hedge. It is not a growth asset. Whereas stocks and buying real estate as an investment is a very different story. And those are growth assets. All right, so now let's look at the same exact time frame. We're going to look at 1926 to 2024. And I want to look at that time frame when it comes to the S &P 500, because there's very different rates of returns for the S &P 500 during that time frame than we see in the housing market.

8:32So the nominal returns over the course from 1926 to 2024 is we're looking at 10.5 % to 11.5%. And the real returns is 7 % to 8 % is where we are landing. Now, if you include dividends in this, it's going to be 11.5 % since 1970. So if we look back to 1970, you have an 11.5 % rate of return since 1970 when you factor in dividend reinvestment. Now, anybody listening right now who doesn't know what dividend reinvestment is, a lot of times when you invest in an index fund or you invest in an ETF and you're buying the S &P 500, you have the option to reinvest your dividends. It's usually just a little checkbox inside of your brokerage account.

9:10Always check that checkbox unless you're looking to live on that money right now, because when you check that, it's going to make sure that you are reinvesting your dividends and you are just growing your portfolio faster, especially if you are a long-term investor and you are looking at doing this for retirement. And so this is the big deal here. Now we're looking at housing, which is 4X since 1970. And the S &P 500, as we talked about at the top of the show, is 70X since 1970. So that is a 17 to 20 times difference during those timeframes. And this is why the Wall Street Journal chart that we are talking about here that we showed at the beginning of the episode, we'll put it back on the screen right now, is so impressive.

9:46You can see the drastic differences here. And the reason why there's drastic differences is because there is a huge, huge difference between the two. Now, this is where 99 % of the people who think about buying a house, this is when they get it wrong. Now, everybody here, I want to understand the real cost of a home. We're going to break this down right now. And in addition, if you want to run these numbers on your own, grab our total cost of ownership calculator. It's going to be linked up in the show notes down below, or you can go to mastermoney.co slash resources. We also have it there. What this is, is this is a spreadsheet that is going to show you exactly how much you are spending when you buy a house.

10:24And in fact, it will also do a comparison to the local rent in your area. So you put the local rent numbers in your area. It is going to spit out a calculation that shows you exactly how much you're spending on a house. Now, I love this tool because this is going to help you make decisions and make better decisions overall. Or you may be able to realize, oh, shoot, I probably bit off more house than I can chew. And maybe you have to make a financial decision, a big financial decision, because you made a mistake and you just were not educated on this stuff yet. But we're going to dive into the total cost of owning a home next.

10:56All right. So total cost of ownership is where 99 % of people get this wrong. And what you need to do is understand the true cost of owning a home. And we need to list out all those different costs. So what we're going to talk about first is mortgage interest. So So obviously, for most people out there, when you go out and buy a house, unless you pay cash for that home, you're going to get a mortgage. Now, there's been a lot of conversations as of late of things like the 50-year mortgage that's stretching out your mortgage payments. And if you want an entire episode on that, we will absolutely do it because that's a huge issue in and of itself.

11:25But for most people out there, if you go out and get a mortgage, you're going to have an interest rate. That interest rate is a true cost to you that you are spending in order to borrow money to buy your house. Now, this is a cost that is associated. Most people think about this cost and they know this is associated with the cost of buying a home. And so a 30-year loan means that 50 % to 70 % of your payments are pure interest if you stay in that home over the course of 30 years. Now, most people are like, well, I'm not going to stay in my home for 30 years. Maybe I'll stay what the American average is, which is 7 to 10 years.

11:56If you stay in that home for 7 years, here's what they do. The banks are smart about this. They know you're going to do that. They know most people do that. and they don't stay in their home. And they usually, on your mortgage, will front load the interest, meaning the majority of the interest is gonna be up front because most people leave. And so they want you to pay that interest early. And that way they can make the most possible money. That's how they typically do it. And so you wanna make sure that you understand that. Number two is property taxes. So no matter what, even when you have a fully paid off home, you are going to have to pay property taxes, which makes your home somewhat of a liability when you live in it, because you're always gonna have costs for the rest of your life.

12:31You're gonna be spending money. Sure, it's an absolutely an asset. I'm not saying it's not. I'm not Robert Kiyosaki. I'm not going to argue that it's not an asset. It's absolutely an asset. But there are liabilities that you have to pay, and there are things that you're going to have to pay for the rest of your life, even if you pay it off in cash. And taxes are one of those things, where on average, 0.4 % to 2.2 % of your home value every single year is going to be in property taxes. I have a new build home, okay? What I built my home in this community, they also had to put in sewers. They had to put in roads.

13:00They had to put in water. all these different things. And so we pay an additional fee on top of our taxes called CDD fees. And we have to continue paying these over the course of the next 20 years so that they can recoup some of that money. This is in addition to already paying property taxes. So my taxes in my specific area are actually very high. And if somebody doesn't run the numbers or understand how this works, they could get themselves into a sticky financial situation when that happens. Now, the national average for taxes is 1.1 % of the value of the property. So that's something that you want to make sure that you note is that you're going to be paying property taxes.

13:37And if you don't bake those numbers in and you don't know what that number is, it's very important to know what that number is. If you're shopping for a home and you're like, I don't know where to find that number, just go to your local property appraiser. It can either be the county appraiser. Sometimes it could be a municipality or a city, but it's usually your county appraiser, especially where I live at least. And you can look it up and see what the property taxes are on any house in that area. And then you're going to figure out, okay, well, if they've owned this house for a very long period of time, maybe there's going to be some sort of adjustment when I purchase this home, if I'm purchasing it for a lot more than they originally purchased or where they have the assessed value currently.

14:09And so you want to make sure that you look at that too, because the number could go up when you buy that home. Now, here's the big one most people miss. And this is where I want you to think about your home. And if you are a homeowner, you know all about this stuff. And when it rains, it pours when some of this stuff pops up is at least 1 % of your home value per year. And for a lot of people, it's 2 % 3 % of their home value is for maintenance and repairs. Now, it may not be every single year that you pay 1 % to 3 % maintenance and repairs. It may be most years you pay more than that. It depends on how old your home is.

14:39It depends on where your home is. It depends on the weather conditions in your area. It depends on, honestly, the quality of the products in your home, like your water heater and some of those other things. And so most people just need to understand, well, a roof is going to cost me. A roof used to cost$5 ,000 on a 1 ,500-square-foot home. Now it's costing between$10 ,000 to$25 ,000 on a 1 ,500-square-foot home. And you may be saying to yourself, well, yeah, but I'm not going to have to get a roof for another 10 to 12 years. That is still a cost that needs to be baked in every single year and saved up for.

15:08HVAC systems, $6 ,000 to$12 ,000 for an HVAC system. A water heater is$1 ,000 to$3 ,000. All of these things, if you live in a home for 30 years, all of these things will break. Plumbing, foundation, painting, flooring. So if you want to update the home with some flooring, or if you want to repaint your 10 years. And in the interior of your home, depending on if you have kids and pets, and or if you have less people living in your home, it will depend on the frequency. But for us, for specifically, I have three kids under the age of seven, and we had two older dogs. And so we were repainting the house interior all the time.

15:40And painting is expensive. If you haven't looked at this lately, paint is expensive. Painting a home is expensive if you hire somebody interior or exterior. So painting the exterior of a home, depending on your square footage, is going to be tens of thousands of dollars. I mean, it is a real expense that you must factor in. And so if you don't think about this stuff, these capital expenditures, they will come and bite you in the butt when it's time to get ready. So you need to make sure you're saving on the side for some of this stuff. This is why emergency funds also exist so that when these come up and surprise you, it is not a big, big deal.

16:10Now, we also have things like plumbing issues pop up, like little maintenance things, maybe a toilet breaks, maybe a sink has an issue, maybe you need a new faucet. All of these costs are gonna add up and you're going to continue to have to pay for this stuff. Now, here's another cost that you really should never get rid of, no matter what, even when you have the home paid off. I know mortgage providers require you to have this, but you also should continue to have this, even if you have your home paid off, which is insurance. Home insurance is absolutely no ifs, ands, or buts. You must have that on your home if you're a true wealth builder.

16:39Why? It's protecting you against a number of different situations, and it could be financially disastrous if you don't have it. Let me give an example. My in-law's house is in Florida, and it is a house that my wife's grandfather bought way back in the day for really cheap. It is right on the ocean. Two years ago, I guess it was a year and a half ago now, Hurricane Milton came in, and it didn't look like it was going to be as bad as it was, but they are so close to the water that they had eight feet of water in that house. The entire house flooded, the entire thing. And so because of this, thankfully, they had flood insurance to be able to repair the entire inside of the house.

17:14They had to gut the entire thing. They weren't living in their house for like six months because this hurricane came on and it flooded their entire house. You may live in an area where there's tornadoes. You may live in an area where there's a fire. You may live in an area where there's just some sort of issue that could come up into play. And if that happens to your home and you don't have the cash on hand, it could be financially disastrous for your life. You must have insurance always, always, always, no matter what. I have people in my real estate network, for example, who have a number of different rental properties and there's always something disastrous that happens to one of them.

17:46One of them just told me they had a fire at the house. They had to actually use insurance because of the fire that just happened. So there's just so many different things that you wanna make sure that you insure on your home. Now, in addition, we have utilities. Now, sure, you're gonna have utilities when you rent a house too. So typically those could be a wash, but if you buy a bigger house than what you're renting, then that cost could go up over that timeframe. Also HOA fees. If you live in a location with HOA fees, I have HOA fees, but they're$100 a year and the HOA doesn't really bother me.

18:12It's not a huge deal for me, But for some of you out there, that could be$100 to$300 per month, depending on where you live. And I've heard of HOA fees being even higher than that. And so you got to make sure that you factor those in. Now, here's a big one most people don't think about, which is closing costs. Now, if you're on the buyer's side, you have closing costs of 2 % to 5 % based on you going out and getting a loan and having to go through the application. And there's all these different closing costs associated with that. If you're on the selling side, it could be 6 % to 10 % because you have to pay agent fees and commission.

18:39You have to do prep on the home and make sure you are renovating and making sure everything's painted, making sure everything is ready to go. These costs are big, and most people don't think about that. When we sold our last home, for example, we painted the exterior. We painted the interior. We actually redid parts of the kitchen. We had to redo parts of the bathroom so that we could get the maximum value on that home. Then we had to pay agent fees. So you have to pay 3 % to 6 % on agent fees depending on what you have going on there. It's really expensive. So just to get out of your own home, you have to pay 6 % of that.

19:08And so this is why the returns go down so much over time on a home because you have all these different things. Now, the last thing we haven't even talked about yet is renovations. Most people renovate their home and renovations are great, but they are not an investment in your home whatsoever. In fact, it is very hard to find a renovation where you even recoup 100 % of your return. Now, if you haven't done the numbers on this or looked into this, you have to look at the real true value of the renovations that you're doing. For example, a lot of people think kitchens and bathrooms, they'll recoup that.

19:38Plus they'll make money because they redid the kitchen and the bathroom. In some situations, maybe if you're going to sell it right away, but over time, that kitchen and bathroom are going to slowly start going out of style and you're going to want to upgrade it again when you sell the home. And so most people think they're making an investment in their home, but instead they're actually spending money on something that they value. If you value renovations, nothing wrong with that. I would renovate, you know, if I had an outdated bathroom, I would be happy to renovate it. That'd bring me joy. If I had an outdated kitchen, I'd be happy to renovate it.

20:04That'd bring me joy and happiness, but it's not an investment decision. Your money would be much better served investing those dollars. You need to realize this is a lifestyle choice, not an investment decision. We have done TikToks and Instagram videos talking about the average rate of return on specific home renovations, and almost none of them get a 100 % rate of return. It's like a front door, maybe some hardwood flooring can get you a 100 % rate of return. But again, that's when you sell it right after you do that renovation because it's a newer renovation. If you put some wear and tear on those, then you're going to have to do some upkeep or fixing before you actually go out and sell a house.

20:37Then there's the maintenance stuff, the regular maintenance stuff, the lawn care, which could either if you hire someone, it's, you know, it's 100 bucks a month, or it could be something where if you, you know, mow your own lawn, you enjoy doing that, the products to keep up your lawn, the mower maintenance, the gas, all these different things are going to cost you money. And they're going to cost you money frequently over and over and over again. New homeowners, you know, you're at Home Depot all the time. You're at Lowe's all the time. You have to frequent those stores. You got to be on those rewards programs because it's just costly to own a home.

21:08But think about some of the other maintenance items. If you have a pool, you got to maintain the pool. You got to clean the house. You got to do all these different things. You can't call up a landlord, just get anything fixed. Every little thing that needs fixed is your responsibility. And so all of those maintenance items that we're talking about here have an opportunity cost. And it's the opportunity cost that if you rented the house, you would have the ability to go out there and you could call the landlord and they would pay for all of those things. But you were paying for them out of your pocket.