Real Estate vs. Stocks – Which is a Better Investment Tool
Real Estate vs. Stocks – What is Right for You?
There are a lot of articles online that present views and opinions about real estate vs. the stock market. Most make sense and there is nothing wrong with what is being said. One can go in for either one of these two types of investments. As far as I am concerned, it does not make sense to invest in just one type of investment. Both have equal importance. Both are an essential part of wealth building. There are advantages and disadvantages with both the type of investments. More importantly, there is a right time for each depending not just on market performance, but also the stage of life that you as an investor are in.
The biggest advantage in a nutshell is that stocks are highly liquid. You can sell and move your investment anytime with a simple click of the mouse. Whereas real estate is not liquid and it takes time to sell. That’s perhaps the biggest advantage of stocks over real estate.
How Leverage Works in Real Estate vs. Stocks – Is Real Estate Better?
The biggest advantage in real estate is that real estate allows you to leverage. You only put 20%-25% down payment which allows you to borrow four to five times the amount as a loan from a bank. Tenant’s monthly rent services the loan and other rental expenses (like property taxes, insurance and maintenance fees etc.) either partially or fully.
Stocks can also be leveraged using a margin account or by borrowing money from one’s line of credit. But the borrower in this case must service interest payments or margin calls from his own money or by selling stocks, as the case may be. This is a big disadvantage when comparing leveraging method to invest in stocks vs real estate.
So even if the property appreciates by just 4% a year, the return quadruples based on 25% down payment. That’s the biggest advantage investing in real estate.
In Canada, there are a few tax saving plans that can be used to invest in stocks, for example: registered accounts like RRSP, TFSA etc. If you are already invested in these assets, it may make sense to diversify into real estate.
The basic idea for all investments is to accumulate wealth, save on taxes and to retire rich. Since I am not a licensed financial advisor, I will refrain from commenting further on the intricacies of tax saving and investing in RRSP or TFSA etc.
Key is to stay diversified
Approach for the Young
I advise most of my young or millennial clients to go buy real estate to get rich. GTA real estate market has a great future for many years to come. We have an acute shortage of land for housing developments and the Places to Grow Act has made real estate a great investment opportunity. With Metrolinx extending itself into the GTA, it makes sense in buying in places where there is good transportation, connectivity and high demand.
When it comes to buying your own home to live in, there is no comparison since it is your personal need. It makes a lot of sense not to rent when you have seen that properties have appreciated so much in the last decade.
So why would you pay to make the landlord richer? Again there is no comparison here when it comes to stocks and real estate when you are buying real estate to live and enjoy.
Yes, you can do comparison when it is investing between real estate vs. stocks if you already own a home, and here I recommend staying diversified in both types of investments.
But the first investment you have to do is to buy a home, to have a shelter over your head where you can sleep and enjoy as opposed to living in a rented property where the rent keeps increasing every year. Sometimes the landlord may want to move in or you may simply have to move out from one place to another without gaining any appreciation, but just paying higher rent when you make a move.
Approach for Downsizers
When you are downsizing at a later age you may not want to handle investment properties, deal with tenants, or deal with repairs. While you are young you can do this for your investment. As you slow down that may not be the best time. After 65 you can start selling your investment properties (that’s my goal at least!) and bringing that money to other asset classes which can pay around 5%-8% interest a year.
My financial advisor advises me to invest in ETFs that pay high dividends and to enjoy hassle-free dividend income in my retirement years. We also talk about selling our principal residence and cashing out the 100% tax free gain from the sale of the principal residence and investing the proceeds into safe stocks/ fixed income mutual funds etc. and moving into a rental property. These are the kind of things that one may do after speaking to one’s trusted financial advisor!
Does Buying a Home Make Sense in 2020?
In my opinion, this is a good time for prospective home buyers. Qualified buyers with good income and available money for down payment can find good condos or homes for own use or as an investment.
Yes, COVID-19 pandemic has impacted real estate and has created uncertainty around jobs and steady incomes, but buying and selling is still happening, and if you have a steady income, it could be a prudent move to buy or invest in a property right now. Post COVID outlook is looking good by and large.
GTA property prices are moving up very fast as Ontario is getting a surge of newcomers with housing demand from US H1B visa professionals (many Top IT guys) who are moving to Canada and also from the recent Start-Up Visa Program which is attracting many wealthy buyers in the GTA.
Can Real Estate be Better Compared to Stocks
I have talked about three things: Timing (cost of opportunity), Need (personal life stage requirement) and Diversification (balance between assets).
If you had picked up stocks let’s say during the crash in 2008 or as recent as the stock market melt down on March 18, 2020, you would have made whopping returns to-date that will outperform any gains from real estate.
But one reason why real estate may be better than stocks is “leverage” that you simply cannot get in stocks.
You can buy an investment condo with as little as a 20% down payment. That means you can use an initial investment of let’s say $100,000 to buy a Mississauga condo worth $500,000. Now let’s say this condo appreciates by a modest 5% per year for 10 years. It can be worth $750,000 (simple interest calculation). That’s a 250% return on your initial $100,000 investment or 20% per year!
You may see greater returns on a couple of stocks but you may not see that kind of average growth per annum on your entire stock portfolio. FP Canada is the professional body for Certified Financial Planners (CFPs) in Canada. Their 2020 Projection Assumption Guidelines found the average long-term return assumptions from 11 actuarial and asset management firms for bonds was 3.15%. Canadian stocks, foreign developed market stocks (like the U.S.), and emerging market stocks were forecast at 6.05%, 6.25%, and 8.02% respectively.
This is just a simple explanation without getting into the overheads or other costs associated with real estate. However, no price can be put on the sense of security, both emotional and financial that comes with home ownership. Throw in an additional investment property or two, it surely gives one confidence of being able to tap into the equity when downsizing or retiring.
Being a landlord of an investment property may not be everyone’s cup of tea, but then following the daily ups and downs of the stock market may not be suited for some others.
So the answer is yes, real estate can be better than stocks, depending on your personal situation and market conditions.
