The question of the century in Canada - a question we often get.
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The real estate market always has people feeling FOMO. Prices keep skyrocketing, leading some to jump into buying condos or houses without really thinking it through. Others are investing in real estate simply because they're not sure where else to put their money.
So, let's break it down and get a clear picture of what real estate investing really is.
Here's what drives real estate prices:
- Interest Rates: Rates go up > mortgages become expensive > fewer people can afford to buy > demand goes down > prices go down
- Housing Supply: Population goes up by 5% > housing supply only goes up by 2% > more people than houses > demand is higher than supply > prices go up
- Economic Factors: Economic downturn > people get laid off > less confidence in purchasing a home > lower demand > prices go down
- Government Actions: New policy launch (e.g. FHSA/first time home buyers plan) > encourages population to save to buy a home > people have more money for a home > demand for homes increase > prices go up
There's more to consider, like foreign investors and rules about where you can build, but let's stick to the basics for now.
Let's talk about the costs of investing in real estate:
- Buying a property costs more than just the sticker price. You've got property taxes, maintenance, insurance, and legal fees to think about
- If you need liquidity for expenses or other major purchases, you cannot offload real estate immediately
- Also, don't forget about the time and effort it takes to deal with tenants if you're renting out the property
When it comes to deciding where to invest your money, it's important to weigh your options:
- Real estate prices don't usually shoot up by 20% every year like they have been lately. On average, they grow by about 2-4% each year in a stable market
- On the other hand, a mix of different stocks tends to grow faster, usually by 8-12% each year
- Looking at the big picture, stocks tend to outperform real estate over the long haul if you're patient
- But there's something to be said for owning a physical property. It feels more tangible, and sometimes you can find a great deal in a neighborhood that's about to turn the corner
In summary:
- Real estate can be a big part of your financial picture, but it often means putting a large chunk of your net worth into one asset class
- If you're looking for a higher-growth bet in the long run with less headache, a diversified basket of growth equities might be the way to go
- Ideally your “life” portfolio should be a mix of real estate + stocks + fixed income. However, for most people today, more than half of their net worth is tied up in real estate