Islamic Finance Educator & Founder
I started The Intentional Currency because Muslim women deserve more than fragmented advice and empty promises. We deserve a system built around our values. A space where faith and finance finally meet
Start Building Your Halal Financial Future
As Muslim investors – our options are slightly limited.
We stay away from interest – so bonds and high interest savings accounts are off the table.
Two of the most common halal investment opportunities are: real estate and the stock market – but which is the better financial decision?
During many of my 1:1 sessions, the discussion around buying a house comes up. Many feel like buying a house is a good way to secure a strong financial future – however the numbers show that this is not always the case.
Let’s take a look at the pros and cons of each – and which is actually the better financial decision.
Real Estate Investments
Advantages:
Challenges:
US Stock Market
Advantages:
Challenges:
So which is the better financial decision?
Let’s say you have 100,000$ to invest.
And you decide to buy a house.
The average cost of a house in Montreal is 500,000$.
You can expect to pay:
At the moment you purchase:
Your 20% downpayment (100,000$)
An extra 3% to your notary/lawyer + in taxes (15,000$)
Monthly:
The average interest rate right now is 6.29%.
This means your monthly mortgage payments will be 2,628$
*note 2,096$ goes to interest and only 528$ goes towards paying down your balance.
Annually:
Home maintenance: 1% average
5,000$
Annual taxes: (.8% average)
4000$
Home insurance:
1000$
FIVE YEARS IN:
You have paid:
15,000$ in initial fees
118,480$ in interest
25,000$ in maintenance
20,000$ in taxes
5,000$ in insurance
Total cost: 183,480$
Your mortgage balance:
360,800$
The value of your house: (Canadian historic appreciation is 6.93% over the last 23 years)
699,000$
Equity (value – balance of your mortgage):
338,200$
In other costs: 183,480$
Your 100,000$ investment (downpayment) made: 54,720$ in five years.
_________________________________________________
Let’s say you have 100,000$ to invest.
And you decide to invest in the halal ETF SPUS.
Since buying a house means you wouldn’t be paying rent, let’s make sure we consider that you would be paying rent if you invested in the stock market.
The average rent for a house in Montreal is 2,600$/month – and rent increases are 3% per year (less in Quebec)
FIVE YEARS IN:
You would have paid:
165,651$ in rent
The value of your 100,000$ investment: (Average S&P return over last 20 years is 8.19%)
148,229$
Your 100,000$ investment made: 48,229$
So far the person who bought the house has a higher return – but let’s look closely:
The person who invested 100,000$ in buying a house:
Made 54,720$ over five years.
Paid around 833$/month in taxes/repairs/insurance + 2628 for their mortgage
Total housing costs: 3461$/month
The person who invested 100,000$ in the stock market:
Made 48,229$ over five years.
Paid 2,600$/month in rent
Total housing costs: 2,600$/month
*saved 861$/month or 51,660$ over five years
**Had the person who rented also invested that 861$/month of savings, their investment would be worth 211,740$ at the end of five years (more than DOUBLE what the home owner made)
To summarize:
Investing will almost always be the better financial decision because of the additional costs + labour required when purchasing a home.
That being said, the stability you gain from buying a home is an added value we cannot quantify when comparing renting vs. owning.
Overall when it comes to your investment strategy – if you would like to benefit from investing in real estate, REITs offer a much easier and lower cost option than making a purchase.
Other considerations:
When purchasing real estate as an investment, there are tax benefits that offset the cost of interest + maintenance which do improve the returns.
Sources:
Teranet + National Bank of Canada (House Price Index)
Irrational Exuberance [Princeton University Press 2000, Broadway Books 2001, 2nd ed., 2005] (S&P500 returns)
wowa.ca (Average Montreal rent + house price)
