Welcome to September’s Homewatch post. In this installment, we discuss the potential pros and cons of investing in the stock market versus the Toronto real estate market, specifically in the world of today’s market conditions.
Given the roller coaster ride that is the frenetic Toronto real estate market recently, more and more investors are asking me whether they should place their capital in stocks rather than property. Our current unpredictable environment breathes new life into an age-old argument: stocks or locks – which is the better investment? The answer, of course, is not as straightforward as the question.
As far as I’m concerned, stocks and real estate are equal opportunity investment vehicles. One investment is basically words on a piece of paper, while the other is essentially a pile of bricks and mortar. They both offer value; they both offer, generally speaking, the opportunity for long term growth; they both are susceptible to risk; they both have a role to play in a diversified portfolio. It really comes down to matching product to person, including sensitivity and tolerance to risk – as well as one’s own personal time horizon. The potential for profitability is very much linked to the law of averages, as well as to investor education and experience. How informed are you about your investments?
Something to consider when weighing investments (which many people do not), is your home as part of your overall investment portfolio, including the value of the asset and the amount of mortgage you’re leveraging against it. A commonly overlooked fact is that your mortgage is held against your investment, which makes you vulnerable against fluctuations in interest rates – not just to the fluctuations in property values. Real estate can absolutely continue to skyrocket in value over the long term, but it’s also illiquid – which could be problematic if you’ve got all of your financial eggs in one basket.
From my perspective, there is one fundamental distinction between real estate and stock. We all need and understand the value of shelter, as a fulfillment of a basic human need. So unlike stock, owning bricks and mortar provides a return on investment in addition to meeting this need, which I consider a pretty amazing ‘value added benefit’. Add the advantage of not having to pay capital gains on the sale of your principal residence, and that your real estate investment has inherent appeal to a target market that are genetically wired to buy makes real estate, in my opinion, a wise investment. But I’m no stockbroker – I’m a realtor who knows bricks and mortar really, really well.
Should I Buy & Hold?
I have always been a proponent of the ‘Buy and Hold’ mentality of investing. Once a hallmark of the depression era generation, for successive generations since, the buy and hold approach to property ownership fell out of favour. As housing became its own fashion economy, homebuyers bought, upgraded/renovated/staged, and then flipped their residence on to the next. But there is a false “get-rich-quick” perception when it comes to real estate; even flippers can be challenged to turn a decent profit, as they are always on the hook for a small fortune of closing costs associated with Toronto real estate. If, in conversation, it seems that people are making huge profits by buying and selling homes in quick succession, there is a good chance that the figures are not completely accurate; there are lots of fees and expenses in owning a home that detract from the true short-term profit that people don’t always take into account.
It’s still being done, but much like our current fashion forecasts, I believe this trend is changing. More and more buyers are looking to eschew the status buy-in, bypass the Herculean effort and expense of property climbing, and instead find a suitably-sized functional modest residence that can serve as a long term buy and hold family dwelling. Instead, homeowners are investing more capital – personally and financially into their properties, through custom renovations. If you’re a boomer or a zoomer, there is an opportunity to diversify and to open access to liquidity, if you start thinking about cashing out of your over-sized house and splitting your capital into smaller properties you can buy and hold.
Are Changing Market Conditions Too Risky?
As you’re reading this, a new technology was just invented, a product just got improved, and an occupation – once common – has just become obsolete. Tomorrow, these changes will begin impacting market conditions. What this guarantees is there will always be market conditions to be concerned with. But, barring calamity, I believe if you as a real estate buyer or investor steer the course, navigate prudently, and hold for the long term, you’re pretty much assured a profit. Remember, the only people who ‘lose’ money on real estate are the ones who ‘have to sell’, not the ones who ‘choose to sell’.
In real estate, and in life, there are things we anticipate and that we can control – and then there are those that we cannot. There is both bravery and sincere wisdom in drawing on business experience to say, “I don’t know.” While these are indeed unpredictable times, I do know that the fundamentals in Toronto provide the likelihood that the market will sustain itself in a positive, profitable manner; the likelihood of a ‘bursting bubble’ has been over-hyped and sensationalized by the media. However, I can’t help but wonder about the forces that lurk beyond our borders, even further out of our control. These are big betting days indeed. Wouldn’t you agree?
At urbaneer.com, we make it our business to understand the dynamics of real estate, including how the volatility of the stock market can impact the value and demand for real estate. With a multi-disciplinary education on housing, over twenty years in real estate sales, and a commitment to service, consider making urbaneer.com your realtor of choice! Specializing in renovated and restored character dwellings, low-maintenance living, revenue-producing properties and loft conversions, call Steve today.
Steven Fudge & The Urbaneer Team
Bosley Real Estate Ltd., Brokerage
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