Key Post Should I buy a house for cash or rent and invest the money instead?

This thread discusses the situation where someone has the cash to buy a home outright.



Related topics:
Should I buy a property with a mortgage or rent?
I own a home and I have €200k cash. Should I buy another property or invest in the stock market?
I own a home worth €200k and I have €300k cash. Should I trade up to a house worth €500k?
I live abroad, should I buy a home in Ireland for when I return?



Case study
This guy faces an interesting decision
– continue to rent and invest the proceeds in the stock market, or
– buy a house and live in it rent free



It’s clear that he would be better off buying a home than putting the €200k on deposit.
As the best deposit rates are around about 1% after taxes, he will earn a net €2,000 a year in deposit interest. So he will be €8,000 a year better off buying a house. The only caveat to this, is where he expects a sharp decrease in house prices, in which case they should wait until he feels that house prices have stopped falling.



It’s also clear that he would be better off buying a home than investing in the stock market
The tax treatment of a person’s home in Ireland is so generous, that buying a home will always be better than investing in shares. In some other countries, the tax treatment is not so favourable, and many people choose to rent their home, and invest their savings in the stock market.
If he buys a home, he gets the following return on his money




The key thing is that this is a net return. There is no tax payable on the rent saved. Likewise, the gain on his principal private residence is exempt from Capital Gains Tax.



If he invests in the stock market, his dividends will be taxed at c. 50% and capital gains will be taxed at 33% - say an average of 40%. So he would need an annual return of 12% before tax to beat the return on buying his home.



We can’t forecast house prices or the returns on the stock market with any accuracy, but it’s most unlikely that the long term returns on the stock market will be in excess of 12%


Buying a home eliminates financial risk
He is taking unnecessary risk by not buying a house

• The stock market might fall over the long term
• House prices may rise and he might not be able to afford to buy
• Rents may rise
• But worst of all, he is taking the risk of a triple whammy, where the stock market falls, house prices rise and rents rise. This is very unlikely, but why take the risk?

He needs to live somewhere, so he is always going to have accommodation costs. By buying a home, he is making sure that he will always have accommodation. By buying a house, he is effectively eliminating risk.

House prices may rise and fall. The stock market may rise and fall. Rents may rise and fall. He will be unaffected if he owns his home.
There are other financial incentives to buying a home to live in

• He can rent a room tax-free
• If he ever needs social welfare, his home will be disregarded in assessing his means. Whereas investments in the stock market of €200,000 would be enough means to eliminate any entitlement to social welfare.

Non-financial considerations favouring home ownership

• Ireland is just not a good country to rent in - very few unfurnished apartments; very few professional and responsible landlords.
• He can decorate and furnish the house to his taste and his requirements, not to the taste and requirements of the landlord.
• Security of tenure – He will never lose his home if he owns it, but if he rents, he will have to leave if the landlord wants it back.
• Security of tenure allows him to put down roots

Are there exceptions to this rule of buying a house?

• If he feels that house prices are going to fall from their current level, then he should wait until they have fallen. This is risky as it’s difficult to forecast house prices and especially difficult to identify the bottom of the market
• If he doesn’t know where he is going to be living in the medium term, he should rent instead of buying. It’s better to have a portfolio of shares than to own an investment property. If he buys a home, but then has to move job, he will end up with an investment property.
• If he needs cash to start a business, then he should continue to rent. He needs the cash and he needs the flexibility of renting. If the business fails, he can rent a cheaper home while he is recovering.
• If he is approaching retirement, it may make sense to max his contributions to his pension scheme instead of investing all his money in a house. However, if he does this, he may consider taking out a mortgage to buy a home.

If he already owns a home which meets his needs, any further savings should be invested in the stock market instead of buying another property


Case study




As this is a pure investment, the tax advantage relating to home ownership disappears. Rental income will be taxed at the same rate as dividend income. Any increase in value of the house will be taxed at the same CGT rate as any increase in value of the shares.



In the past, the long term returns on the stock market, have generally exceeded the returns on residential property in Ireland and in most other markets.



Other reasons favouring investment in the stock market

• Diversification – he already has a €300,000 stake in the housing market. If he invests in another house, all his eggs will be in the one basket
• Hassle – an investment in the stock market is passive. To maximise the return on an investment in property, he must actively manage the property and the tenants.
• Liquidity – he can turn his shares into cash very quickly. In a downmarket, it can be close to impossible to sell a residential property.
• Flexibility – he can sell part of his stock market investment and keep the rest. If he owns an investment property, he must sell it all if he needs cash.

“I own a home worth €200k and I have €300k cash. Should I trade up to a house worth €500k?”

Arguments in favour of trading up

• Any increase in value will be exempt from CGT
• You will have a much better house
• You may save money on commuting
• You may be able to rent a room tax-free
• The value of your home will be ignored in any means testing

Arguments in favour of investing in shares

• The return on your investment is likely to be higher
• Investing in shares is better diversification
• You will have dividend income
• If you need cash, you can convert some of your shares to cash very easily and quickly – you can’t sell part of a house
• A bigger house has higher running costs
• A €500k house will cost €540 more each year in Local Property Tax than a €200k house
• You can use the cash to contribute to your pension fund which is very tax effective

It's a matter of personal choice. If you need a bigger house or a more expensive home closer to where you work, then spending the additional money is worth doing. If your current home meets your requirements, then you should not trade up to a trophy home.

I live abroad and am considering buying a home for when I return

In general, this is not a good idea.

• While it is not your home, it will be taxed as an investment and, it's better to invest in shares. Depending on where you are living, investment income off shore may be treated more favourably.
• It can be messy getting tenants out when you need the house for yourself
• When you get a job in Ireland, the house might not be in the best location for you.