This article was written in November 2009.

There are two schools of thoughts when it comes to buying real estate.

One school believes in real estate investment. Followers of this school will patiently and diligently make their mortgage payments month after month for the next 25 years. At the end they would have a free house. Wonderful. Isn’t it.

The second school believes that it is better to rent their homes and use the money intended for a down payment on a house for investment. Not too long ago we heard of double digit return on stocks and mutual funds and if you were astute and lucky enough, you could achieve tremendous return on trading stocks or mutual funds. Followers of this school believe that after 25 years their money would have increased way in excess of what they would get if they had purchased a home instead.

To illustrate this point, let me give you a typical real example. I first bought my home in 1980 for $100,000.00. My down payment was $25,000.00 which was the minimum requirement at that time – 25 percent down. Nowadays you can buy a home on a zero down payment. That house will now be selling for around $500,000.00. Five fold increase after 25 years or so. My $25,000.00 initial investment has now increased 20 fold. Not bad.

On the other hand the second school of thought would argue that if they had then invested $25,000.00 in various instruments they would come ahead of the gains in real estate investment.

I took my calculator and worked out the results. My findings are as follows:

Investment – Rate of Return Compound Annually – Final Proceeds

$25,000.00 – 10% – $ 270,867.00
$25,000.00 – 11% – $ 339,636.00
$25,000.00 – 12% – $ 425,001.00
$25,000.00 – 13% – $ 530,763.00
$25,000.00 – 14% – $ 661,547.00
$25,000.00 – 15% – $ 822,973.00
$25,000.00 – 20% – $2,384,905.00

It appears that the real estate gain is equal to the investment gain at approximately 13% rate of return compound annually.

I then checked some of the mutual fund return. For example Empire Life mutual fund shows a top return of 11.61% average over 39 year in their Empire Equity Growth Fund. Their worse fund was Empire Global Div Growth with a negative return of 20.9% average over 3 years.

I also checked CIBC mutual fund return. Their best mutual fund, CIBC Monthly Income Fund returns 7.6% average over 11 years. Their worse was CIBC Global Monthly Income Fund return at negative 3.6% average over 3 years. Their oldest fund, CIBC Canadian Bond Index Fund returns 5.3% average over 35 years.

It would appear that it is extremely difficult and rare for some one savvy enough to achieve 13% or more average return over a 25 year period in order to beat the real estate investment return.

My conclusion is that real estate investment is a far better bet than investing in stocks or mutual fund in the long term. There will be obviously some rare cases of stock or mutual fund beating real estate investment. There are and will also be cases where real estate investment has gone sour. If you do your home work properly you cannot go wrong with real estate investment in the long run.

Further, profits on investments are taxable whereas real estate appreciation is tax free if it is your principal residence.

There will be arguments that monthly mortgage payment on a home will far exceeds the monthly rent paid on similar property. But according to my findings, mortgage payment on a 75% home financing is more or less equal to the rent on similar property. In fact with the current low interest rate and the drop in property value, the mortgage payment on a 100% home financing is not too far from the rent charged on such property.

[Teabuffet.com]