Stocks vs real estate investing

[Camerus]

Recently I have been looking at getting involved in real estate investing.  I currently do have a decent stock portfolio relative to my income level and age, so I am not a total stranger to stocks.

I also understand that, historically, stocks have outperformed real estate – however, I question to what extent that has been true within the past 6 years or so (i.e. the time during which I have been an active investor) and going forward.

As I value my time, and am willing to diversify in different Canadian cities, my goal would be to run the properties through use of a management company (who'd take about 7-10% of monthly rents, a cost I recognize would cut into cash flow), so I am not concerned about getting calls at 2 am to go and fix a toilet.

Basically, from the (admittedly preliminary) research I've been doing, I am becoming increasingly convinced that real estate is a better investment than stocks.

Thoughts?

[Malthus]

I think right now is a dangerous time to get into real estate investing in Canada.

I'm the last to take any notice of the loose talk about bubbles and whatnot (which have been wrong for as long as I've been interested in the market), but there is no question real estate is trading very high, based on historic low interest rates. That would make me hesitate before thinking about using it as an investment opportunity.

[Valmy]

Well I am doing a big time realestate investment right now but my city is growing faster than most malignant tumors these days. Probably depends on the market? And I think using management companies are totally worth it, 7% is way worth the peace of mind.

[Tonitrus]

Investing in real estate, even using PM companies, has always seemed to me to be a big administrative headache.

So I invest in REITs instead, and let someone else do all that work. 

[Valmy]

Investing in real estate, even using PM companies, has always seemed to me to be a big administrative headache.

So I invest in REITs instead, and let someone else do all that work. 

If this turns out to be the case I will just sell. I bought both properties in 2008-2009 so I would do pretty well. I just want to be become the great Central Texas Slum Lord someday.

[Barrister]

You're crazy.  Don't do it.

I take it you're talking about buying houses or condos and renting them out.  If you're doing more sensible like investing in a REIT then we can have a conversation.

You're also probably taking on a mortgage with each property, expecting the rent to cover the mortgage payment.  This is called "leverage", and yes, it can win fantastic returns - but it can also make enormous losses.

I'm curious why you're considering this.  You do explicitly state that "historically, stocks have outperformed real estate" which is true.  But then you point to one very narrow data point - the last six years.  Yes - probably residential RE has outperformed the TSE over the last 6 years (though I'm not sure of that - the TSE had a pretty good run until the oil crash).  But why would you think that will continue indefinitely?

The facts are that residential RE has gone up quite a bit in the last 15 years or so.  Here's the first chart I could find:



But look - there are long periods when house prices have remained flat, or even declined.

We've had some debates on this board before on whether Canadian residential RE is in a bubble or not.  Some, like CC, are adamant that it is not a bubble.  I think it is.  But I think the only two realistic views are "prices are in a bubble" or "prices are very expensive, but justifiably so".  Nobody in their right mind things residential RE is undervalued.

I'm also concerned that you framed it "stocks vs real estate".  It implies you're going to do one or the other.  When you invest in "stocks" you are actually investing in a huge range of different industries.  You're investing in oil companies, in agriculture, in services industries.  You can invest in Canada, or in foreign countries.  In a word, you can diversify your investments.

If you're putting all, or most, of your money into RE you're investing in one specific industry.  It would be like investing only in oil company stocks.

Any financial planer will tell you that you need to diversity.  So, I guess, if you have a lot of assets, having some portion in residential RE isn't terrible.  But I don't think you're independently wealthy.  You probably have just enough to scrape together a 25% downpayment on a house.  That means you'll be putting nearly 100% of your assets into one single investment.

Look - everyone has to live someplace.  I'm not getting into the "rent vs buy" debate for your own residence.  But as a pure investment vehicle, Canadian residential RE is terrible right now.

[Phillip V]

Wait for the next crash and then invest.

[Malthus]

Look - everyone has to live someplace.  I'm not getting into the "rent vs buy" debate for your own residence.  But as a pure investment vehicle, Canadian residential RE is terrible right now.

I would agree with that. The usual debate is with people who argue one should not buy for one's own residence because of an impending crash. That's a different argument. 

[Admiral Yi]

A recent academic paper claimed that the long term real appreciation of housing is zero.

[Barrister]

By the way (and not to pick on Camerus) its posts and talk like this that make me think there's a bubble.

There's an old story, possibly apocryphal, about a trader who got out of the market before the 1929 Crash because he overheard shoe shine boys exchanging stock market tips. (some googling suggests it was attributed to Joseph Kennedy)  But I've heard in real life more than a few people talk about, or actually get involved, in buying residential RE as an investment.

[Malthus]

A recent academic paper claimed that the long term real appreciation of housing is zero.

Depends on how long-term and how general. In Canada at least, over the last 100 years a lot of small towns have grown into big cities, and I find it hard to imagine, even taking depreciation and inflation into account, that long-term the appreciation in such places has been zero as land has gone from farmland to office towers. The key is location. 

That being said, I don't think real estate is the sort of investment appropriate for the small investor. One's own house is a different and more complex story, as it is both investment and consumption.

[Camerus]

By the way (and not to pick on Camerus) its posts and talk like this that make me think there's a bubble.

There's an old story, possibly apocryphal, about a trader who got out of the market before the 1929 Crash because he overheard shoe shine boys exchanging stock market tips. (some googling suggests it was attributed to Joseph Kennedy)  But I've heard in real life more than a few people talk about, or actually get involved, in buying residential RE as an investment.

If simply beginning a discussion about the merits of real estate investing vs stocks "makes you think there's a bubble", then that says more about your preconceived notions than anything else.

As for the alleged real estate bubble, it's been going on for my entire adult life.  Land is a finite resource, and with immigration and other kinds of population growth, people are going to need places to live. Yes, the real estate market can go stagnant for periods, but it's not as though the stock market is immune to that particular phenomenon either.

As for framing the question as stocks vs real estate, it's just because I have been investing in stocks and, with my investment capital going forward, I can continue to buy solely stocks or put some towards real estate, hence the either or dichotomy. 

[crazy canuck]

By the way (and not to pick on Camerus) its posts and talk like this that make me think there's a bubble.

There's an old story, possibly apocryphal, about a trader who got out of the market before the 1929 Crash because he overheard shoe shine boys exchanging stock market tips. (some googling suggests it was attributed to Joseph Kennedy)  But I've heard in real life more than a few people talk about, or actually get involved, in buying residential RE as an investment.

I got out before the tech bubble burst because I heard people on my bus talking about "can't lose" stock tips.

If I could buy a place at a reasonable price within a reasonable commute to work I would sell my house now for the same reason.  But I am effectively land locked because all prices in every category of housing are crazy at the moment.   But I cheer myself up in knowing that at least I bought it during the last mini crash after 08.

[crazy canuck]

By the way (and not to pick on Camerus) its posts and talk like this that make me think there's a bubble.

There's an old story, possibly apocryphal, about a trader who got out of the market before the 1929 Crash because he overheard shoe shine boys exchanging stock market tips. (some googling suggests it was attributed to Joseph Kennedy)  But I've heard in real life more than a few people talk about, or actually get involved, in buying residential RE as an investment.

If simply beginning a discussion about the merits of real estate investing vs stocks "makes you think there's a bubble", then that says more about your preconceived notions than anything else.

As for the alleged real estate bubble, it's been going on for my entire adult life.  Land is a finite resource, and with immigration and other kinds of population growth, people are going to need places to live. Yes, the real estate market can go stagnant for periods, but it's not as though the stock market is immune to that particular phenomenon either.

As for framing the question as stocks vs real estate, it's just because I have been investing in stocks and, with my investment capital going forward, I can continue to buy solely stocks or put some towards real estate, hence the either or dichotomy. 

It comes down to your resources.   As BB said, if you are leveraged and would have to dump the property in a downturn then that would give some pause for reflection.  But if you have the resources to keep your properties over the long term that is another matter.

[The Brain]

Will you get prima nocta rights?