Interesting article on renting vs buying

I don't know if this is a fair comparison, but here is an easy way to look at leverage, which the article below seems to have missed.

If you "invest" $100k into real estate, you generally put down 20% or less, so you are starting with a $20k investment.

Let's assume that in the time it takes to quadruple the value of the real estate investment, you could have made 10 times on your money by investing in the stock market.

Investment Multiplication Future Value

Home
$100,000 x 4 $400,000
Stock
$20,000 x 10 $200,000


There is a better return on the real estate, not because it is a better investment (only four times as opposed to 10 times), but because of the leverage (now worth twice as much as the stock investment).

Actually, you invested $20K in your home and made $380K ($400K - $20K)
Which is a return of 19X on your $20K

You invested $20K in the stock market and made $180K ($200K-$20K)
Which is a return of 9X

Thus even though the house "only" quadrupled in value you made 19X on your money.

While the stock "only" went up by ten times in value you made 9X on your money.

So you did 2.11 times better on the house.
Leverage pays off.


The real estate, if renters are not paying for it, is still a liability until it is paid off, but the leverage is what makes it better. Try asking the bank for $100,000 to invest in the stock market, and they will probably laugh at you. Sure you can get a margin account, but they won't give you $100,000 for your $20,000 deposit. On the other hand, you have lenders fighting with each other to give you money for real estate.

Article: Why rent? To get richer

http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?page=1