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John sits in his cushioned chair, takes a sip of his steaming coffee, and tells himself “I will try to keep an open mind and see the logic to Justin Ewers of U.S.News latest blog article reprinted in the Yahoo! Real Estate section.”

In case you don’t click over to read the article, Justin’s post suggests to us that renting a house and investing your monthly savings may be a better investment than investing in owning your own home.

This sparked a challenge in my head. Which investment is truly better?

I have broken Justin’s article down to 3 main quotes from his article that I will comment on in regards to this idea.

The Challenge

Ok, so you’re not a trained real estate investor and you want to know if there’s any truth to Justin’s article showing how renting can be a better investment than owning.

Here are a few quotes from this article with my replies below:

Quote 1

An $80,000 down payment could be invested instead in a mutual fund earning 8 percent, and housing comes with myriad other expenses, from maintenance to insurance to taxes, none of which build equity.

It’s not unreasonable to walk into a house with $20k to $30k equity right from the start. Can you buy a mutual fund and say the same? Furthermore, most people who don’t follow the stock market will probably have a hard time maintaining an 8% rate of return on their mutual fund or CD. In reality, they are probably looking more around 4.5-5%.

Sure if they stayed on top of the market they might be able to pull it off, but imagine what they could do if they invested that kind of time and energy in real estate investing. You could buy a house and turn around and flip it for a profit in 2-3 months and earn a 300% return on your money . . . in just 2-3 months.

No stock can do that.

Score 1 for owning your own home and investing in real estate.

Quote 2

It (renting) can also be a sound long-term investment. According to Fidelity, if renters save even $300 a month—the difference, say, between their rent and a monthly mortgage payment—that money, invested in stocks growing at only 4 percent, could add up to $114,000 in 20 years.

I don’t see the logic in this but ok, let’s take a closer look and run the numbers.

Let’s assume your tax bracket is 28% and the expected long term inflation rate works out to 3.5% over the next 20 years (and don’t forget the principle of the Time-Value of Money).

Option 1 - Renting: You spend $1200 a month on rent as opposed to paying $1500 a month by owning; thus, you save $300 a month by renting rather than owning. You invest that “extra” $300 in a stock growing at 4% for 20 years. After 20 years you now have added a total of $114,000 to your net worth, however, you’re still renting.

Option 2 - Owning: You purchase a home for $209,371.16 (yields a monthly payment of $1500 a month for a 20 year loan), put $10,000 down, and have an APR of 6%.

After 20 years you will own a house worth $436,502.29 and have saved $42,176.08 in income taxes.

This means after 20 years of investing, Option 1 gives you $114,000 added to your net worth and Option 2 gives you $436,502 added to your net worth PLUS an extra $42,176 the government allowed you to keep in your pocket.

The score is most definitely now 2-0 in favor of owning.

Quote 3

“Over long horizons, if you reinvest the savings,” Harlow says (an economist at the Fidelity Research Institute), “you’re probably not going to find that much difference between renting and buying.”

Uh, see my response to Quote 2. We should really think about what we say before we say it.

And the final score is 3-0 in favor of owning your own home vs. renting and saving.

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As you can probably see, I love discussing this stuff.

There are many kinds of investors out there, but probably the two most well known are the real estate investors and stock market investors.

Most people agree (even the stock guys) that real estate is the best investment out there.

Read any millionaire book; attend any wealth building conference; analyze the world’s most wealthy people and what you will find is a reoccurring theme that real estate is the best investment you can have.

Justin’s article makes investing and owning your own home sound as cut and dry as buying a house and only watching it add to your net worth on average 3-4% per year (in the past, that’s about the average price a home increases in value).

Anyone whose read my How To Buy A House Like A Real Estate Investor series knows there are many methods you can use to walk into a house with a significant amount of equity starting on the day you move in. This is something you cannot do when buying stocks.

Why I Wrote This Article

I wrote this post not only because I felt the need to respond to Justin’s article (his posts don’t allow for comments) but also because I think it’s important to show entrepreneurs that just because it’s written doesn’t mean it’s necessarily correct.

You have to discover things for yourself. As you become more and more successful in your entrepreneurial journey, you will probably one day find a calling to invest your hard earned profits in something. So be sure to get all the information first.

What’s your take on all this? I’d like to know.