Real estate vs Mutual Fund

I read a pretty detailed article somewhere that compared the options of buying a house vs. renting and investing in a Mutual Fund. As expected buying a house was a worse option financially than renting for house sizes that were bigger than 600 sqft.

Anyways let us try to do an independent analysis.

Let’s assume you buy a house for 60 lakhs. 20% upfront payment and 80% on loan with a 20-year term. Most people pay off the mortgage in 10 years so let’s compare the two options at the 10-year mark

 

Option 1 – Buying and renting at 20K/month assuming a 10% appreciation in both rent and capital value every year.

At ten year mark, your house will be worth approx 1.55 crores. But you would have paid an EMI of almost 5 lakh every year and would still have 33.5 lakh of principal loan amount left.

On the positive side, you would have earned rent through the house and if you invested it all in Mutual Fund which gave a 20% CAGR the rent amount would be worth 74 lakhs.

So if you liquidated your house, paid off your loan and liquidated your Mutual Fund on the 10th anniversary, you would have 1.95 crores pre-tax with you. Pls, note that I have not considered tax benefits, etc. here as I believe they are not worth factoring in anymore as tax saving on interest paid on the 2nd house has gone away.

Option 2 – Now let’s assume you go for an equity MF which gives 20% CAGR instead of buying the house.

12 lakh that you used for down payments would be worth 74 lakhs.

5 lakh EMI saving invested in Mutual Fund would be worth 1 crore 54 lakhs. Your net-worth if you liquidate on 10th anniversary would be 2 crores 28 lakh.

Please note that I have considered 10% return on real estate and 20% return on equity Mutual Fund. If you go by last 10-year record, MF returns were closer to 20%, but real estate was much lower, so the case for MF is even stronger.