Look beyond real estate investment

Sunday, February 16th, 2014

Lori Pinkowski

The ever-popular topic of real estate in Vancouver is showing no sign of letting up, as it continues to dominate headlines.

For example, the long time controversial program that gave immigrant investors a fast-track to citizenship has now been abolished as of the 2014 federal budget. Most applications were headed for B.C., and as a result I expect Vancouver’s high end housing and condo markets to see downward pressure on prices. This is yet another reason to think twice before buying real estate for investment purposes.

Contrary to what investment industry professionals recommend, Statistics Canada shows that half of our country’s personal wealth is now sunk in property. Many Canadians continue to feel that the real estate market is safer and will give a better return over the long run compared to the stock market; however, there are a number of reasons why investors should reconsider this notion.

There have been times in the past, particularly in Vancouver, where one could see annual double digit returns from property. Unfortunately this appears to be changing and real estate investors need to be prepared for lower returns over the next decade. For those in disbelief, consider a report from TD Bank projecting an annual rate of return to be roughly two per cent for real estate over the next decade when taking inflation into account. In my opinion, better returns can be achieved by investing in stocks over the same period.

When it comes to rental properties, many believe you can generate a great deal of extra income from this type of investment. Unfortunately many rentals are barely cash flow positive, as the expenses and mortgage payments are higher than the income generated. The trouble is, the amount you get paid from your tenants isn’t necessarily your return, it’s what you are making after expenses and mortgage payments. Once you’ve factored in the headaches of being a landlord, it can make the experience all the more undesirable.

When you look at your ability to “get defensive,” a stock portfolio is actually safer. For example, when the U.S. housing market crashed, many people were stuck with real estate that they couldn’t unload. Consider how long it can take to sell a home and the actual cost in selling it? With an investment portfolio of stocks and bonds, you can quickly sell at any time, raising cash in a single day if necessary.

Many investors worry about possible volatility and the uncertainty associated with investing in the stock market. It’s a strange love affair Canadians have with real estate – no one worries about the value of their home daily, therefore why stress out over the fluctuations in stocks on such a regular basis. It’s normal and healthy for the stock market to rise and fall (as we’ve seen recently) and as long as you have an active investment strategy in place to protect your portfolio from a significant decline, then you should feel comfortable with your investments in the long run.

The bull market for real estate may be losing steam, so re-evaluate your investments going forward and don’t get stuck attached to the rear view mirror.

Lori Pinkowski is a portfolio manager and senior vicepresident, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Friday on CKNW at 5:35 p.m.

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