Recognizing the significant added risks that investing in real estate vs stocks can lead to is key to making smart decisions
There are a variety of considerations when deciding on investing in real estate vs stocks. It’s easier to start investing in real estate and get financing than to raise money for stock investing because real estate tends to be less volatile and easier to appraise. It also generally produces more current income. It also rarely drops drastically overnight, as some stocks do from time to time.
Eventually, rents can rise to a point where they cover the mortgage, taxes, maintenance and other expenses. By then, you may have a big capital gain. But that can take many years. Meanwhile, you have to “feed” your property, as real estate investors say—that is, invest additional funds to cover the shortfall between rents and expenses.
Be aware of all of the costs and constraints of investing in real estate vs stocks
Capital-gains taxes are also applicable to gains on homes you buy for investment purposes, such as rental properties. Moreover, this type of real estate investing in Canada involves a number of other commitments that can make it feel more like running a small business than, say, investing in stocks. With stocks, you only have to tell your broker to buy—everything else is done for you.
In contrast, when you own rental property, you have to spend time finding and dealing with tenants, arranging for maintenance, doing the accounting and so on. You can hire others to do these tasks for you, but that can get very expensive.
Many real estate investing enthusiasts say that if you buy a property with a 20% down payment (seen as a minimum to qualify for government-backed mortgage insurance on a property that is not your principal residence), then a 20% rise in the property’s value means you have doubled your money.
However, that claim neglects the costs of selling (up to 5% or 6% for real-estate commissions, plus lawyer’s fees and related costs). It also overlooks any negative cash flow you may have experienced while you owned the property, because rents failed to cover expenses.
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Investing in real estate vs stocks: Be prepared for added risks in real estate investing
Real estate investing in Canada can entail higher levels of risk than stocks. That’s because real estate is less liquid, more expensive to manage and to buy or sell, and highly geographically concentrated. Rising crime, unpleasant neighbours and other changes on the street or in your property’s neighbourhood can make it hard to find tenants or buyers. So can physical problems, like adverse traffic patterns, backed-up sewers and zoning changes that allow undesirable development, or limit what you can do with your property.
Most real estate investing millionaires earned their profits by taking on a lot of risk, worry and work. They also went into it with realistic expectations and the intention of sticking with it for many years.
Many also owe at least part of their real estate investing success to timing: they bought when real estate had been in the doldrums for years. If you buy at or near the end of a boom in prices, you may need to wait for a subsequent boom before you can sell for much of a profit.
Don’t miss these real estate investing tips for Successful Investors looking to buy right now
My advice to those now in the market to buy is to go ahead with a house purchase as a consumer item, provided that you can live with any temporary price decline that may come along. If you hang on to your house and use it as your principal residence for a decade or two, you’ll probably wind up with a substantial capital gain. Better yet, that gain will probably be tax-free, as it is under current Canadian tax laws.
Of course, before buying you’ll want to be reasonably sure that you’ll be able to make the payments on your mortgage, as well as cover taxes and other expenses, and live with the higher interest rates you may face when that mortgage matures.
Maximize your stock market gains by following TSI Network and using our three-part Successful Investor strategy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Investing in real estate vs stocks does not have to be a decision of one over the other. Investors can engage in both if done correctly, like by using REITs. How have you used REITs within a diversified portfolio?
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