#29. Buying A House and Investing In Unit Trust: A Comparison

Find Out Which Benefits You

Many people want to buy a house for them to live in. They dislike renting house. That's totally understandable. I am one of them. You may be one too. However, have you ever actually sometimes think the what-if question? What if I have invested in Unit Trust instead of buying a house? I asked this burning question a lot and started doing a calculation and compare if I would be better of if I have invested in Unit Trust?

This is my own experience. You may use your own figures and amounts for your own calculation.
I bought a house during a developer's launching for RM185,000 in 2001. I took a loan of of 90% plus 5% MRTA. As I wanted to avoid the ups and downs of the BLR (base lending rate), I went for an Islamic house loan at about 7.5% for 30 years. My loan instalment is RM1230.

You can refer to the table above to calculate your monthly home loan instalment. My loan amount was (185,000 X 95%) RM175,750 X the factor above 0.00700. 30 years loan at 7.5% rate. I need to pay RM1230.25 per month.

Now, let's do a chart to compare how much we spend on the monthly instalment till 2008 and compare with if we are renting (yes, we need a place to live, don't we?) and at the same time investing in Unit Trust.

You will see that the first 2 years of the house loan amount was low because the house was still under construction. While the house, was under construction I rented a place for RM500 per month.

After I moved in to the house in year 2003, I found out that my neighbour was renting the hosue for only RM500 while I pay a monthly instalment of RM1230.25! People are telling me, hey, at the end of 30 years, the house will be yours. Renters will still have no house after 30 years. OK, I am comfortable with that thought. Just only for a while. I make my own comparison further.

If I sell of my house now at the current market value of RM220,000 and after deducting my outstanding loan with the bank, I will have RM65,000. Since I have paid for RM12,000 when I was renting for the first 2 years, I need to deduct this further. Therefore I get only RM53,000 in profit.

I think the figure is still not right. I need to minus of my initial downpayment of RM18,500 and the total loans I have paid, RM104,178. Now, I am at a loss of (53,000-18,500-104,178) RM69,678. So far, the cost of owning a house have set me back RM69,678 in red! Wait, there is more. How about the twice a year tax on the house by local council of RM147. Two times a year from 2003 to 2008, that will be RM1,764. Arghh, I am getting miserable now looking at all these figures. How about those Ringgits that went to the bank and lawyers for all those fees of getting a loan and doing up the sales and purchase agreement! Many thousands there which I can't recall the exact figure. Also some payment I made to the developer just before they handover the key to me!

What IF?

Let's look at the what-if situation. What if I had invested in Unit Trust and at the same time just renting a house. I would be able to invest a monthly sum of RM730.25 because since I have prepared to commit to a sum of RM1230.25 a month for the house loan. If I didn't own a house, and renting at RM500, I would have a sum of RM730.25 left to be invested away every month!

And if I had not placed RM18,500 for my house downpayment, I would have been able to use it as an initial investment for my Unit Trust fund. At the end of 2008, I would now have in my Unit Trust a sum of RM148,674.55 assuming that my investment gives me an annualised return of 10%. If I liquidate my investment and minus the rentals I have paid all these years, I would have a sum of RM100, 674.55. However, the money in hand I would have may be RM148,674.55 comparing to selling of my house; I would only have a sum in hand of RM65,000 (RM220K-RM155K). Definitely so much more!

On the other hand, with the current money in hand minus the rental and minus all the paid funds for investment, I will have only a profit of RM12,070.55 (148,674.55-88,604-48,000). At least I am not in red comparing to owning a home.

Now, there's more. Remember I mentioned about those lawyer fees and sales and purchase agreement fees! And the house tax! What if I don't have to pay for all these and invest the money away? Then, the money in hand that I may have will be even more!!

The truth is, how many people would invest in Unit Trust and not buy a house? The money you invest in Unit Trust will keep growing in a compounding way. Your house value doesn't grow in a compounding way. At the end of 30 years, your investment may afford you to purchase 2 if not 3 houses at the future market value. That's the power of compounding! It's too lengthy to discuss here how I derived the figure of affording 2 to 3 houses 30 years later. However, when I have shown it to my friends, they are now thinking twice of owning a house. ;-)