Welcome to this month’s installment of Dear urbaneer, where we put our real estate savvy to work to field questions that have been troubling our clients.
This time around, we have a client who is asking a question that is asked frequently - around water coolers, fireside chats and around dinner party tables: which investment is better - real estate property or stocks (or other similar investments)?
I’m looking to buy a home with a long-term plan to help build up the asset side of my own personal balance sheet. Given the heat of the Toronto market, doesn’t it make sense to bulk up on real estate property versus investment stocks? I know that there are risks in investing period, but doesn’t it seem like real estate’s upside keeps climbing? Am I accurate?
Locks or Stocks?
Here's our response:
You’ve hit on a very timely point that is often discussed and debated. There is no straight answer to which investment is better - locks or stocks. They both offer value; they both offer, generally speaking, the opportunity for long term growth; they both are susceptible to risk; they both have a role to play in a diversified portfolio. It really comes down to matching product to person, including sensitivity and tolerance to risk - as well as your own personal time horizon. Real estate can absolutely skyrocket in value over the long term, but it’s also illiquid - which could be problematic if you’ve got all of your financial eggs in one basket.
It’s important that you really evaluate your wants and needs in an investment context - beyond your wish list for finishes and location.
Something else to consider when weighing investments against (which many people do not), is to look at your home as part of your overall investment portfolio - including the value of the asset and the amount of mortgage you’re leveraging against it. A commonly overlooked fact is that your mortgage is held against your investment, which makes you vulnerable against fluctuations in interest rates - not just to the fluctuations in property values.
As a property investor and homeowner, you’re also starting off on the right foot by recognizing the long term nature of both of these investments. There is a false “get-rich-quick” perception when it comes to real estate; even flippers can be challenged amassing a small fortune along the way given all of the closing costs associated with Toronto real estate. Here's Dear Urbaneer: What Are The Closing Costs For A Property Purchase? and Dear Urbaneer: How Can I Keep My Flip from Flopping?
If, in conversation, it seems that people are making huge profits by buying and selling homes in quick succession, there is a good chance that the figures are not completely accurate; there are lots of fees and expenses in owning a home that detract from the true short-term profit that people don’t always take into account. We’ve written about this in another Dear urbaneer post, called “Dear Urbaneer: How Much Profit Should I Expect Climbing The Property Ladder?
So, what are the realities of investing in a hot market like the one that currently exists in Toronto? Certainly, property values have kept on climbing. Don’t be fooled by the length and strength of the upswing in this market which is approaching two decades when, historically, Toronto real estate has peaks and valleys every 7 to 10 years. What goes up, generally comes down and, as we’ve touched upon in our forecasts - here's our latest Urbaneer’s Fall 2015 Toronto Real Estate Forecast: Part One - which summarizes a number of factors in place that could trigger a market correction.
There are ways to build and boost your property value over time though. We subscribe to the “location, location, location’ mantra of real estate. Choosing a property that has access to public transport, green space and amenities (think shopping, schools and restaurants) are the trifecta that helps a property retain and grow its value. Here's a past post that encapsulates our point of view called Dear Urbaneer - On Choosing A Winning Location.
The condominium market is a little different, in that Toronto has a large amount of ubiquitous, “box-in-the-sky” buildings, which means that your property runs the risk of being lost in a sea of others, as well as being more vulnerable to greater fluctuation in pricing as a result. In addition to the usual “location, location, location” strategy, urbaneer always contends to rely on the “unique” factor as well. Seek out a condo with a thoughtful floor plan, quality finishes, and unique features like a terrace, high ceilings, or protected views. Similarly, commit to the upkeep in your condominium, as this housing type gets dated more quickly than their single detached property counterparts. Here's some guidance in Dear Urbaneer: How Do I Boost The Value Of My Condominium?.
Property investors certainly have reaped huge rewards from their real estate over the years. The results of the battle of the landlord versus the shareholder are in, at least according to a recent study from BMO Nesbitt Burns. The study shows that over the last 15 years, investors who owned condominiums versus investors who held stocks actually came out ahead. The value of their investment outpaced TSX-listed stocks. Here is a story from the Globe and Mail that has the stats and explains the report called, “Toronto Condo Owners Outpacing TSX Investors”.
And as Chief Economist, Sal Guatieri, points out, the real estate investment was less subject to the major volatility seen in the stock investment. This, as he summarized, may have meant less sleepless nights for the investor. But on the other hand, as a shareholder you’re not going to get a call in the middle of the night to attend to some property disaster, which you very well might as a landlord. This underscores the importance of knowing yourself and how suitable what type of investment would be for you. This is a real measure of its success, alongside its financial viability, of course.
I wrote about this topic first back in 2011 when the stock market was volatile. In this Urbaneer newsletter called Locks Or Stocks? Which Should I Buy?, I noted there is one fundamental distinction between real estate and stock. We all need and understand the value of shelter, as a fulfillment of a basic human need. So unlike stock, owning bricks and mortar provides a return on investment in addition to meeting this need, which I consider a pretty amazing ‘value added benefit’. Add the advantage of not having to pay capital gains on the sale of your principal residence, and that your real estate investment has inherent appeal to a target market that are genetically wired to buy makes real estate, in my opinion, a wise investment. But I’m no stock broker - I’m a realtor who knows bricks and mortar really, really well.
Are you considering property investment? There are pros and cons; we’d be delighted to talk to you about your needs, property investment objectives and help you find a property that impresses today and will grow over time. With several decades of experience navigating the Toronto housing market for the long term, as well as a multi-disciplinary education that allows us to deliver, comprehensive, valuable, relevant service, please know we’re here to help!
~ Steven and the urbaneer team
earn you trust, then your business
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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