Mutual Funds or Real Estate – Which gives you the Best Return on Investment?

The debate whether you should invest in mutual funds  or real estate to get the best return on your investment, is one that has carried on for decades.  The challenge is that there is a big financial industry that invests millions of dollars in advertising in order to appeal to Canadians, so that they can put their money in mutual funds each year.  This same industry makes money through their fees, known as Management Expense Ratio (MER) fees.  This is a percentage which Mutual Fund companies charge their clients, whether their clients has made money or not.  Canadians pay some of the highest MER fees in the world.

Let’s try to keep this simple, start with $100,000 and use a 25 year window give stocks the advantage here and not include the MER fees, and give it a high rate of return of 7.5%. In 25 years, you use annual compounding of 7% and you have $167,743 + $100,000 of your initial investment so that’s $267,743 Wow, that’s an incredible number!

Now let’s do the same thing with Real Estate.  Now we are only looking at leverage, mortgage pay down, and appreciation, which is really just three of the eight profit centers of real estate and will ignore forced appreciation, cash flow, and tax deductions.  So let’s say the property would basically break even.

To keep it simple $100,000 in down payments in real estate would allow you to purchase $500,000 in real estate because real estate is a leveraged investment.  You can put 20% down and the back will give you a mortgage for the other 80% of the funds on a 25 year amortized mortgage.  Let’s use an average of 3% appreciation over the 25 year average which is well below the Toronto Real Estate Board average.  If you own your home think about the appreciation that you have seen.

So in 25 years you would own the real estate free and clear, which adds $500,000 into your pocket, the appreciation on the real estate would mean that the value of the property would be $1,120,171 and you have an asset that is giving you income every month.  That’s over four times the value of the mutual fund.