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:

• A hedge against the increase of rent (you are locked in at the price you pay for the house)
• Stability (if this is your primary home)
• Real estate market generally performs quite well

Challenges:

• High upfront costs
• Credit requirement can be a barrier for some
• Requires active management
• Cost of upkeep of the property
• Added cost of city taxes + insurance
• Can be difficult to turn into cash quickly
• Risk of interest rates increasing + mortgage price increasing

US Stock Market
Advantages:

• Allows you to invest in a wide variety of industries and companies reducing the risk of your investment
• Relatively easy to turn into cash
• Easy to find halal options

Challenges:

• Often more volatility than the real estate market
• Easier to lose money as you can easily make emotion-based decisions (it is easier to sell a stock than to sell a house)

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)