What Individual Investors can learn from the failed bank

The collapse of Silicon Valley Bank (SVB) on March 10, 2023, marked the second-largest bank failure in US history. Its stock prices plummeted and customers withdrew millions from the bank, leaving it with a negative balance. The rush to withdraw funds occurred after the bank had lost nearly $2 billion in assets.

SVB had a concentration of deposits from volatile tech start-ups, making their deposits less stable than those of traditional banks. The reasons for SVB’s failure as per the experts, could be many, but the fundamental cause seems to be that the bank lacked the necessary funds when it needed them.

Liquidity planning is crucial – Importance of Cash Flow

This scenario of cash flow and personal financial planning can be viewed as a useful comparison between responsible bank management and wise individual financial planning. This helps shed light on both bank failures and how individuals can improve their financial security.

Long term Investments & Immediate needs

Individuals must also adjust their spending and investment decisions based not just on how much they plan to spend, but when they plan to spend it. It would be unwise to invest your cash in volatile investments if you need that money in the short term in order to buy your First Home, an Investment Property or any other investment in the near term.

While the stock market can be a sound long term investment, it might pose short term volatility and could put your immediate cash needs at risk.

Real Estate Lessons for Individual Investors

SVB failure is an eye opener for people, both young and old. For young people who are saving money to buy a home through other assets like Tax Free Savings Account, First Home Savings Account in their RRSP, this gives you an insight into how safe your investments should be.

A prudent financial advisor at your bank can help you set up your investments judiciously.

Obviously most people want the maximum return on their investment. It is a natural desire and instinct to grow one’s money effectively. But at the same time, risk and reward come into play. More the risk, higher the reward and vice versa.

There can be many opportunities in that regard, which a sound financial planner can advise you.

If you don’t need the money immediately and want to grow the money over the long-term, then it may be fine to have some risky investments in your portfolio. But again this is a topic for a financial planner, which I am not, as my expertise is limited to real estate investment only.

Stocks vs. Real Estate

I had mentioned in an earlier blog post about Stocks vs. Real Estate that to service a real estate loan one can use the rental income to pay off the mortgage. But if one borrows money to invest in stocks then one has to service the debt from one’s own cash. That’s one big disadvantage of borrowing money to invest in stocks, mutual funds etc.

However, real estate also has a big disadvantage when it comes to liquidity.

Just to give you a example, our real estate market in the recent real estate cycle had peaked in the first quarter of 2022.

After that the market had been on a continuous plunge. By December 2022, the market had bottomed, in my opinion. Since January 2023, real estate prices are going back up.

We have started seeing multiple offers for homes in Mississauga, in the Mississauga condo market, homes in Brampton, homes in Milton, homes in Burlington, homes in Oakville etc. there is a lot of activity going on.

But if you had an investment property that you wanted to sell it in March 2022, it would have been the worst time. People who had no choice but to sell their properties between March 2022 to December 2022, the market was at its lowest.

This was a similar to the situation as the SV Bank.  Many of these people had to sell at the lowest point in order to close their other properties.

Smart Home Buyers and Investors with cash in their pockets were able to take advantage of great prices during the lowest point of the market. This reminds me of Warren Buffet’s quote, “Fearful when others are greedy and greedy when others are fearful.”

For investors who held on to their properties as they were not over leveraged, they are totally fine. The market, when it rebounds, always surpasses the last peak, in my experience. We have seen this in 2008 and 2017.  I expect to see the same in 2024 and our prices in my opinion will surpass 2022 peak prices.

Like any business cycle, real estate cycles are a part of life and it does not effect home owners in general until they buy or sell. This is because paper loss or gain means nothing until one actually buys or sells. A smart investor should diversify his or her money into different asset classes and should not put all the eggs in one basket.

What kind of Investment Properties should one Buy

The safest real estate investments to buy and sell at any point would be something which will be a less burden on your cash flow, (meaning smallest mortgage amounts), have minimal negative cash flow or at least some positive cash flow, neighbourhoods where you can find great tenants, good school districts, great connectivity etc.

We serve many real estate investors in the GTA every year. Contact us to find a great investment property and we will put the right tenant for you.

Contact Team Kalia to Buy & Rent or Sell Your Investment Property