Why Buying a Home Beats the Stock Market

Sean Trombetti

Hi everyone, Welcome back to another episode of the Relient Mortgage Solutions podcast. I'm Sean and as always I am here with James to talk all things mortgage and home financing.

James Eveld

Last time we looked at how a down payment creates outsized returns. Today I want to take that idea head on, because there's a number that stuck with me. A statistic I recently saw says about 65 percent of people believe stocks are a better investment than owning a home, but I am not so sure that is a correct assumption.

Sean Trombetti

And I understand why. Stocks are easy to buy, easy to sell, and you'll hear eight to ten percent a year quoted as the long run average before taxes. I've been in this business since 2003, and I'm not here to say stocks are bad. But that comparison leaves out three things about a primary residence. Leverage is the first, then rent versus a fixed payment, then taxes when you sell. Let's start with leverage.

James Eveld

Okay, here's the example. You have sixty thousand dollars. Put it in a taxable stock account and earn ten percent, and you've made six thousand dollars. Ten percent on your money.

Sean Trombetti

Now take that same sixty thousand and use it as a ten percent down payment on a six hundred thousand dollar home. You don't own sixty thousand dollars of house. You control the whole six hundred thousand dollar asset.

James Eveld

So say the home appreciates just three percent. That's eighteen thousand dollars of added value, and the whole eighteen thousand lands on you, even though you only put up sixty. Eighteen on sixty is a thirty percent gross return. Three percent beats ten percent.

Sean Trombetti

I want to stress that the house doesn't need to appreciate thirty percent. It only needs to appreciate three. The leverage does the heavy lifting. And I'd be doing you a disservice if I stopped there, because that's a gross figure. Mortgage interest, property taxes, insurance, and maintenance all eat into the real result. A stock doesn't need a new roof.

James Eveld

That's fair. But there's a flip side. You can borrow against stocks too, on margin, and if the market dips, you can get a margin call. A residential mortgage doesn't get called just because home prices dipped, as long as you keep making your payments.

Sean Trombetti

Right. So the first pillar isn't that homes always beat stocks. It's that leverage gives a down payment a kind of multiplier that a plain stock account doesn't have. Now let's talk about the part everybody feels every month, which is the housing payment.

James Eveld

Here's the illusion. In year one, renting looks cheaper. Say rent is eighteen hundred dollars a month, and the mortgage principal and interest is twenty one hundred. Three hundred dollars a month cheaper. Of course people choose to rent.

Sean Trombetti

But rent moves and that principal and interest payment doesn't. Assume rent rises four percent a year. Year two, it's eighteen seventy two. Year three, about nineteen forty seven. Year four, twenty twenty five. Then in year five, rent hits twenty one oh six.

James Eveld

Which is six dollars more than the mortgage payment of twenty one hundred. That's the crossover. And it keeps going. By year ten, rent is around twenty five sixty, while the mortgage principal and interest is still twenty one hundred. Same payment, a decade later.

Sean Trombetti

And think about where the money goes. Every month, part of that twenty one hundred pays down your loan balance, so your housing cost turns into ownership. For a renter, every dollar is gone. Now, in fairness, only the principal and interest is locked. Property taxes, insurance, and maintenance can go up but it is not likely toincrease as much as the rent will.

James Eveld

Okay, third pillar, and this is the one I think surprises people most. Taxes when you sell. Let's say a married couple buys a home for three hundred thousand dollars and sells it for six hundred thousand. That's a three hundred thousand dollar gain.

Sean Trombetti

Under IRS rules, if you qualify, you can exclude up to two hundred fifty thousand dollars of gain on your main home if you're single, or up to five hundred thousand if you're married filing jointly. So that couple could potentially exclude the entire three hundred thousand from federal income. Zero federal capital gains tax.

James Eveld

Compare that to stocks. Same three hundred thousand dollar long term gain in a regular taxable brokerage account. The IRS says the rate on most net capital gain is no higher than fifteen percent for most individuals, for tax years beginning in 2025. At fifteen percent, that's forty five thousand dollars in federal tax. Depending on your income, the rate could be higher, and there can be other taxes on top.

Sean Trombetti

Now, there are rules. You generally need to have owned the home and lived in it as your main home for at least two of the five years before the sale. For the full five hundred thousand, both spouses generally need to meet the living requirement. And you generally can't have used the exclusion on another home sale in the past two years.

James Eveld

What if you're single? Same three hundred thousand dollar gain, but only two hundred fifty thousand is excluded. That leaves fifty thousand potentially taxable. At fifteen percent, that's roughly seventy five hundred dollars. Still far less than forty five thousand.

Sean Trombetti

And that fifty thousand may shrink. Your adjusted cost basis can include certain closing costs, major improvements like a new roof or an addition, and selling costs like agent commissions. Keep good records. Also, investment properties and rentals usually don't get this exclusion. This is about your primary home. And as always, this is educational, not tax advice. Talk to a tax professional about your own situation.

James Eveld

So when you stack them up, you've got leveraged appreciation, a fixed payment against rising rent, and a tax break most stock accounts don't offer. Stocks still have a role in a diversified plan.

Sean Trombetti

They do. But if you've been told stocks automatically beat a home, run your own numbers. For a lot of people, the home may be the stronger investment, and it's the one you get to live in.

Sean Trombetti

Thats all for today folks. Thanks for tuning into another episode of the reliant mortgage solutions podcast. James, Take care.

James Eveld

Thanks Sean, see you next time.