Making Sense of San Diego Real Estate (Renting and Investing vs Buying)

[Sean Michael]

I'm moving to San Diego next year from Denver, CO and am looking to make the right personal finance decision in the process.  I have the funds available today for the purchase of a rental property as well as a primary residence, but I also want to set myself and my wife up to reach financial freedom.  I've noticed some really extreme discrepancies between renting and potential mortgage payments which make me hesitant to buy a primary residence.

My wife wants to move around 56 (not too far from the ocean), which I don't mind because it seems they have great school districts and we have young kids. We have managed to build a solid liquid nest egg, but I'm hesitant to lock the majority of it up in a low LTV mortgage on a really expensive primary residence. I'd like to put as much as I can to work in order to reach financial independence sooner. When I started to run the numbers of what it would be like renting and investing vs buying, the difference was staggering.

I'm looking for advice on what I should choose.  Also, let me know if these numbers seem correct.  Here are the numbers:

$30k - avg monthly income

3 options for rent vs buying
$12.5k - avg monthly payment (20% down) on $2mil home
$6.25k - avg monthly rent on $2mil home
$6.25k - avg monthly payment (71.5% down) on $2mil home

3 options for return on capital:
7% - avg yearly return on 71.5% down payment (assuming 5% avg yearly appreciation in SD)
10% - avg yearly return on from S&P 500
>10% - avg yearly return on investment property (just an assumption, but I think you are all here because you beat the stock market)

First, the $12.5k monthly is very intimidating and beyond what I should be spending on shelter (a no-go for me).  $6.25k feels manageable, so I compared the rent vs purchase numbers.  I understand that rents will go up over time and my mortgage payment will pay down the principal, but it seems like investing the $1.43mil into rental properties and/or a low fee US stock market fund may work out better for me.  The discrepancy between the monthly payment with 20% down and the monthly rents was mind boggling for me.

Let me know what you would do to maximize wealth under these circumstances.  Also, let me know if I'm missing something here.