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ByLisa Jackson
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Updated:January 23, 2024
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When I was 27 years old, I bought a tiny one-bedroom Toronto condo. It was small but expensive: sitting at the top of my budget, I scraped together a meagre down payment and borrowed from my RRSPs to make the purchase. I rationalized it as an investment and that I was taking my first step on the property ladder.
Fifteen years later, I question my choice. To make the purchase, I had to borrow from my RRSP and couldnât afford to invest for several years. But at the time, I figured buying real estate was a solid investment, whereas stocks were âriskier.â
Apparently, Iâm not the only one dealing with the âstocks vs. real estateâ debate. According to anOntario Securities Commission study, Millennials may be putting off investing because they view saving for a down payment as a more urgent priority. Sixty-eight percent of millennials who donât invest said they have âother financial priorities,â and 56% of non-homeowners place homeownership in their top three financial priorities. Arecent KPMG pollfound that 42% of Millennials are putting their retirement savings on hold to pay off or down their mortgage.
Furthermore, many Millennials see investing as âriskier.â Fifty-seven percent of Millennials who donât invest said one of the reasons is that they are worried about losing money in the financial markets. Homeownership may be perceived as a more secure investment, with that same KPMG poll finding that 78% of Canadians said homeownership is an investment for financial stability in retirement.
So, it begs the question: should you invest in real estate or stocks? Thereâs no simple answer, but as someone who has done both, Iâm doing a deep dive into this question and getting answers from leading experts.
Real estate vs. stocks: an overview
Before diving into the data, letâs cover the basics.
With real estate, you are buying physical land or property, such as a detached house, apartment, vacation property, commercial building, or even a vacant lot. In general, the value of a real estate property appreciates over time, offering a potential return on investment if you decide to sell in the future.
In contrast, buying stock means purchasing a piece (or âshareâ) of a company. So, if you own 20,000 shares in a company that has 1,000,000 shares outstanding, youâd own 2% of the company. Like real estate, as the value of the companyâs shares appreciates, so does the value of your stock.
Real estate vs. stocks: returns
Both stocks and real estate are worthy places to park your savings. But hereâs the short answer:investing in stocksis generally the more lucrative option.
âOver long time periods, stocks beat the price appreciation of real estate, even when looking at stellar markets like Vancouver and Toronto,â says Andrew Hallam, a financial expert and author of the best-selling book,Millionaire Teacher.
Historically, stocks tend to increase in value more quickly than real estate, as well as produce higher than average annual returns. Case in point: the S&P 500 index fundhas historically produced total returns in the 9% to 10% range. Likewise, the Canadian stock market provided an average annual return of approximately 10% from 1970 through 2015. Meanwhile, Canadian real estate prices have only increased by about 5.35% per year over 10 years (ending December 31, 2019).
âSeveral studies on global housing have shown that investing in real estate beats inflation by around 1.3% per year,â says Robb Engen, a fee-only financial advisor and co-founder of the personal finance blogBoomer & Echo. âWhile investing in stocks beat inflation by around 6% per year.â
This 2018 comparison study by RBC Global Asset Managementbreaks it down nicely. National price data from the Canadian Real Estate Association shows an average annual gain of 4.5% nationally from 1993 to December 31, 2018. The hot markets in Toronto and Vancouver did slightly better, seeing returns just above 5%. Meanwhile, the comparable average return from stocks was 8.3%.
I could go on, throwing more numbers and data at you to show that sinking your savings into stocks historically fetches a higher return compared to real estate. But thereâs more to consider with this choice, so letâs move on.
Is buying a house an investment?
It depends. Unless itâs a rental property, experts warn against seeing a home purchase as an âinvestment.â If youâre buying a house for lifestyle purposes, itâs notreallyan investment.
âWhen you buy a home to live in, that is not an investment,â says Hallam. âThatâs shelter. Even when the value of that shelter rises, the person still needs to live somewhere. So if they sell their home at a profit to buy a home across the street, theyâll pay a proportionately higher price for that new home as well.â
Very true. I started out with a $250,000 mortgage for my tiny apartment, and fifteen years later, itâs ballooned into an $870,000 mortgage for a detached house. Yes, I leveraged the profit from the resale of my apartment to buy a larger house, but Iâve also created a bigger debt.
âReal estate should only be considered an investment when weâre talking about the second home, third home, fourth home, etc.,â says Hallam. âPeople who view their residential homes as investments run the risk of a rose-coloured perception. Your home canât put food on your table if you live in that home and donât at least rent part of it.â
In reality, there are a few differentways to invest in real estate. You can purchase a property with the intention of flipping itor evenbuy a vacation property. Looking back at the stats on inflation referenced earlier, Engen notes that those numbers for housing âreflect capital appreciation only.â
âIf you add rental income into the mix, the real estate investing returns were much closer in line with stock returns,â says Engen.
However, buying an income property isnât a sure-fire strategy to go from rags to riches. Unless youâre psychic, thereâs no way to know 100% whether youâll come out ahead or fall flat.
âIf people choose to buy a second or third home for investment purposes, they can leverage the returns by borrowing the money and have renters pay the mortgage,â says Hallam. âWhen doing so, thereâs no way of knowing whether real estate will beat stocks or whether stocks will beat real estate. Anyone who says they can see the future (with respect to this question) is either crazy, deluded, corrupt or all three.â
So, donât buy a house? Is that what youâre saying?
No! If becoming a homeowner is a life-long goal, you shouldnât feel guilty about that. On the flip side, thereâs alsonothing wrong with renting instead of buying(despite what your parents might say). Itâs a deeply personal choice.
âPersonal finance is personal,â says Hallam. âAsk, âWhat are we trying to achieve?â Maximizing money for the sake of maximizing money makes little sense. We know that money itself doesnât make us happy. But it can be a tool that enhances life satisfaction.â
My life-long dream was to own a heritage home with a big backyard. That being said, this couldâve been attained by renting. But itâs also about how Ifeelabout the choice.
âMany people try to see the future and ask, âIs it financially better to rent and invest the difference in the stock market or is it financially better to buy the home?ââ says Hallam. âThatâs unanswerable, without a working crystal ball. But you might find an answer to the question, âHow would it make youfeelto own versus rent?â How we feel is always important. Too many people get lost in the âWhat will enhance my wealth?â question.â
Despite all the data, thereâs no ârightâ answer in this debate. Whether you decide to buy real estate or stock depends on your lifestyle preferences, financial goals, resources, and risk tolerance.
âWe should never forget to use money as a tool to enhance our life satisfaction,â says Hallam. âThat sometimes means using it in ways that donât boost our wealth.â
Pros and cons of buying real estate
What are the benefits and downsides of buying real estate or stocks? Here are some key considerations.
The Pros of buying real estate
Long-term appreciation
The value of your home will likely appreciate over time. So, if you hold onto your home for a prolonged period, thereâs a good chance that youâll be able to sell it for more than the purchase price.
The power to leverage
In real estate, âleverageâ refers tousingborrowed money to investin a property. When âleveraging a property,â it means borrowing money from a lender (like a bank) so that you can purchase real estate without having to cover the entire cost yourself. The idea is to use the lenderâs moneyfirstwithout depleting your own savings. But how exactly is going into debt a good thing? There are a few advantages to this approach:
- It allows you to purchase property that you canât afford. For instance, you may not have $1M cash to blow; but you may qualify for a $750,000 mortgage and can use $250,000 of your own savings to buy a home in Toronto or Vancouver.
- It allows you to maximize your returns. If your mortgage interest rate is 1.75%, but your home appreciates 4.5% in a given year, thatâs a 2.75% gain. Of course, there are no guarantees on an annual return and interest rates could increase. Also, factor ongoing maintenance costs into the equation.
- The initial investment is relatively small. In Canada, you only need a minimum of 5% down payment to buy a property. In my case, I put down just $12,500 to purchase a $250,000 property, which I sold five years later for $319,000.
Essentially, taking on âgood debtâ (like a mortgage) can be an effective way to grow your wealth (provided that you act responsibly).
Possible passive income source
In the era of Airbnb and VRBO, renting out your home has never been easier. As a homeowner, you could bring in extra bucks by renting out the basem*nt suite or your whole house to offset the mortgage. Once the mortgage is paid off, you can still continue to collect rent and earn a passive income from your property.
Secure investment
In general, real estate has generated inflation-beating rates of return, but with much less volatility than the stock market. Buying property can alsodiversify your investmentportfolio and help manage your overall risk without giving up potential returns.
Personal enjoyment
Possibly the biggest benefit of homeownership is the comfort it can provide. Hallam shares an example from his own life: âMy wife and I bought a condo in Victoria. We spend most of every year outside Canada, and we leave the condo vacant. Yes, thatâs a âbad investmentâ on several levels. But money is a tool that (if we spend it right) enhances our lifestyle. When my wife and I visit friends and family in Victoria, we have our own condo to stay in. Itâs a place that gives us comfort.â
Does owning a home give you joy? Take your happiness into consideration.
The cons of buying real estate
Sky-high prices and bidding wars
If youâre shopping inthe hottest real estate markets in Canada, expect to encounter bidding wars, bully offers, and soaring prices. Now, real estate wars are even extending to the suburbs and cottage country. Meanwhile, buying stocks is easy and affordable whenusing an online brokerageorturning to robo-advisors.
You need a down payment
To get into the real estate market, youâll need to put down a minimum of 5% of the purchase price. Plus, if your down payment is less than 20% of the price of your home, purchasing mortgage loan insurance will also be required. In contrast, you can actuallystart investing with just a little bit of money.
It can add to your debt load
Unless itâs a cash purchase, buying a home usually involvesgetting a mortgage,which is a type of loan. It adds to your debt ratio, and if you canât repay it on time, the mortgage lender can repossess your property. Investing in stocks is the opposite: with every payment, youâre building wealth and growing your net worth.
Itâs a money pit
Aside from mortgage payments, real estate typically comes with extra costs (or âholding costsâ), such as property taxes, condo fees, utilities, insurance, and property maintenance.
âYes, real estate is tangible and itâs easy to understand,â says Engen. âBut there are a ton of hidden costs that come with homeownership that often get overlooked. Buying a property without factoring in how it fits within your overall budget and future goals is a recipe for disaster.â
Generally speaking, homeowners should budget 1% to 3% of a homeâs value each year for ongoing maintenance and repairs. Thatâs a lot of money that could be otherwise invested into aTFSA or RRSP.
Itâs a hassle
Whether itâs dealing with snow removal or a basem*nt flood, houses come with headaches and unexpected bills. Plus, if itâs an income property, youâre signing up for a second job.
âWhen buying a real estate investment, you are buying a business,â says Hallam. âThis always includes a PITA (âPain In The Assâ) factor, such as when you get a bad tenant, canât find a suitable tenant, or when the home requires significant maintenance. Businesses require work. Real estate is no exception.â
Pros and cons of buying stocks
Like buying real estate, investing in stocks has its own set of pros and cons. Here are a few key considerations.
Pros of buying stocks
Superior average annual returns
As discussed, stocks tend to increase in value more quickly, as well as produce higher than average annual returns than real estate.
âStocks have been the best performing asset class throughout history,â says Engen. âThe advantage of investing in stocks includes the ability to participate in the future earnings of companies (both foreign and domestic) through low-cost and diversified investments (mutual funds or ETFs).â
Getting started is easy
Homeownership can be time-consuming and costly, whereas owning stocks doesnât require much work. Plus, getting started investing is a cinch.
âNew tools and platforms are available now that make it easy and accessible for anyone to invest in a risk-appropriatemanner,â says Engen. âRobo-advisors automate everything for you, and discount brokerage accounts make it simple to build your own low cost, diversified investment portfolio.â
Itâs cheap
No need to save for a substantial sum to get in the game. Thanks to âFinTech,â anyone can start investing with a few hundred bucks and the fees are minimal. For instance, robo-advisors primarilyinvest in low-cost ETFsand usually charge less than 1% in fees. Alternatively, you can go the DIY investing route with an online brokerage that charges rock bottom trading fees. In fact,some even charge $0 in trading fees.
Liquidity
If you need fast cash, you can easily sell your stocks, whereas selling real estate can take days, weeks, or even months.
Easy to diversify
With real estate, youâre (likely) committing to one property in a fixed location. But with stocks, you can purchase a piece of ownership in hundreds of businesses, and buy and sell whenever you want. You can even invest in a REIT exchange-traded fund â a basket of Real Estate Investment Trusts (REITs) that trade on the stock exchange. It allows you to invest in a range of real estate properties â from malls to residential apartment buildings to offices â without forking over big bucks for a down payment or holding costs.
Cons of buying stock
More volatility
One day, your $50 stock may be riding high at $75/share or plummet to $10/share. Prepare for a rollercoaster ride.
âStocks come with the highest expected returns because they also come with the most risk,â says Engen. âAny individual company can lose money and even go out of business (and they routinely do), so picking individual stocks is inherently risky. Itâs not easy to navigate the investment landscape and find a strategy that works for you at a reasonable cost.â
Market volatility is normal, so expect multiple mood swings from âMr. Marketâ on any given day. However, you can protect yourself against market volatility by building a balanced, diversified portfolio of low-cost stock and bond index funds, and then buy and hold for the long-term.
âMany investors think short-term,â says Hallam. âBut a 25-year-old has roughly a 55-year time duration to invest. People need to consider that their investment durations represent their lifetimes. And over every rolling historical 30-year period, global stocks have earned returns of at least 7.5% per year.â
Potential for panic-selling
If the real estate market dips, you probably wonât stick a âFor Saleâ sign on your front lawn. But living through Mr. Marketâs many mood-swings can trigger intense emotions â even leading panic-stricken investors to sell off their portfolios. âPanic-sellingâ is one of the worst mistakes you can make as an investor, as those who panic-sell often end up buying high and selling low. If youâre prone to panic, put your investing on autopilot.
âSuccessful investors add money to the markets through thick and thin,â says Hallam. âThey donât speculate. They try not to think about market highs and lows. They try not to think about the economy. Fidelity did a report to suggest that the best investors were those who forgot they had money with FidelityâŠ.or they were dead and the accounts were left alone. If people can, they should keep adding money every month regardless of the ânoise.ââ
Tips from the experts
Diversify, diversify, diversify
Whatever you do, donât put all your eggs into one basket. Relying on the value of your home to solely fund your retirement is a risky strategy. Same with sinking your life savings into a single stock. Itâs really not advisable.
The safest strategy is to diversify your investments. It could mean buying a house but also investing a portion of your income. For investing, it means building a risk-appropriate, diversified investment portfolio of low-cost stock and bond index funds, as well as allocate some funds in ahigh-interest savings accountfor emergencies and/or inGICs(the safest type of investment in Canada). Just like anything in life, itâs about achieving balance.
Set goals
âTackle 2-3 financial priorities rather than trying to do everything,â says Engen. âThereâs time to catch-up on RESP contributions and retirement savings if youâre really feeling the crunch of childcare expenses and car payments.â
Once youâve done a bit of soul-searching about your priorities, set a schedule to save for one or two goals â and stick to it.
âIf people put off investing tosave for a home down payment, thatâs not such a bad thing â as long as they donât mess around,â says Hallam. âMake a concentrated effort to build the down payment within a pre-determined time period. Set an achievable, time-oriented goal and then relentlessly pursue it.â
Automate your savings
Whether your goal is to buy property or retire by a certain age, put your savings on autopilot.
âTreat your savings like a bill payment and contribute small amounts automatically every paycheque,â says Engen. âIt adds up over time, and once your budget opens up a bit you can add another financial priority to the mix. You donât have to tackle everything at once.â
Avoid being âhouse poorâ
To achieve homeownership, some people havereallystretched their budgets to the max:a recent pollfound that nearly 25% of Canadians identify as âhouse poor,â meaning they spend 30% or more of their income on homeownership. Yikes!
âPeople shouldnât buy âtoo much house,ââ says Hallam. âIn other words, they shouldnât extend themselves when buying a home. People who live in bigger, more expensive homes are not happier than people who live in modest homes. And people with bigger debts are less happy. My advice is to keep things simple. Own fewer âthingsâ because âthingsâ donât enhance life satisfaction. And by living simply, it will allow you to allocate more money towards paying off a mortgage (or building a down payment faster) and/or investing more money over time.â
The bottom line
Thereâs no one-size-fits-all answer to whether you should buy real estate or stocks. The answer highly depends on your personal circ*mstances and what youâre hoping to accomplish with your investment. Before choosing one route over the other, sit down and consider your current financial situation, your risk tolerance, set your goals, and then see how you might be able to diversify your investments instead of putting all your eggs in one basket.
Buying real estate FAQs
Is buying a house a good investment?
+It depends. The real estate market, though traditionally increasing in value over long periods of time, can be volatile and is not guaranteed to provide meaningful returns. Real estate also requires continuous management and can lead to unexpected, sometimes significant expenses.
When buying a house is a bad investment
+It depends on your needs, your income, your debt, your lifestyle, your long-term goals and the home you are looking to buy. Do your due diligence to determine if buying a house is a bad investment.
Is there an alternative to traditional real estate investing?
+REITs offer an alternative to traditional real estate investing. A REIT is a real estate company that owns and/or operates income-producing properties such as malls, hotels, apartments, and office buildings. REITs distribute most, if not all, of the net income they receive to their unitholders.
Read more:
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Lisa JacksonAuthor
Lisa JacksonAuthor
Lisa Jackson is a freelance personal finance and travel journalist, editor, and blogger who contributes to various online and print media outlets in Canada and abroad, including The Globe & Mail, Toronto Star, Islands Magazine, Fodors, BRIDES, Huffington Post Canada, CAA Magazine, The Food Network, West Jet Magazine, NUVO Magazine, and many others. When she's not writing from her home office, she's busy globe-trotting to new destinations in search of her next story.
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