Investing in Real Estate vs. Stocks
First off, I launched my new blog on March 1st. And these are the 5 most popular posts so far.. have a look if you're interested:
Also, on March 1st, my friend Sean Cooper released his first book - Burn Your Mortgage. Maybe you've heard of Sean. He was all over the news because he paid off his mortgage...at... 30! In his book, Sean chronicles how he did it. Not everyone will have the motivation to pay their mortgage off so quickly but it's an interesting read nonetheless. I endorsed Burn Your Mortgage, and had actually inspired Sean to write the book in the first place, walking him through the publishing process.
We all invest in stocks and are obviously passionate about the markets. And some of you may also invest in real estate too. So, I asked Sean to write a blurb on investing in real estate vs. stocks. This is what Sean had to say:
A common argument is that it doesn’t make sense to buy a home in a big city. That renting is a lot less expensive and the way to go. As real estate blogger Garth Turner so bluntly put it, “Why would any person want to buy a condo in Toronto or Calgary or Vancouver and actually pay twice the monthly cost than it would take to rent the same unit?” Kevin O’Leary of ABC’s Shark Tank shares a similar view. Mr. Wonderful has gone on record saying you’d be an “idiot” to buy a home (I guess I’m king of the idiots, since I not only bought a house in a big city, I paid it off). We’re told we’d be better off renting and investing.
When it comes to the performance of real estate versus the stock market, the findings seem to back this up. The average price of a resale home in Canada was up 5.4% from 2004 to 2013. Over the same time, the S&P/TSX Composite Index posted a 7.97% return. It seems pretty clear: you’re better off renting and investing than you are buying.
So why isn’t the debate over? Because it’s flawed. It ignores the power of leverage. Leverage is a fancy way of saying you’re borrowing the bank’s money to invest in something that’s expected to go up in value. You’re leveraging when the bank lets you borrow up to 95% of a home’s value. The bank doesn’t let you borrow this much money for stocks. Why not? Because real estate is seen as a safe, long-term investment. (It’s also because of collateral. If you lose all your money in the stock market, the bank has nothing, but if you default on your mortgage, the bank can sell your home to recover some or all of its money.) Here’s an example that shows the power of leverage: Let’s say you bought a home a decade ago for $250,000, with only 10% down ($25,000). You later sold it for $400,000, making $125,000 in profit (for simplicity’s sake, we’ll ignore associated costs such as mortgage interest, mortgage insurance, property taxes and closing costs). Even though your home only went up in value by 60%, that’s a 500% return on your initial investment (down payment) of $25,000. Try finding that kind of return in the stock market!
Let me know what you think. And if you're interested you can pick up a copy of Sean's book, Burn Your Mortgage, at 50% discount until March 12th on Indigo. Click here. It's only 10 bucks.
P.S. If you haven't reviewed Market Masters, please post a short review this week on Amazon.ca.
Past Newsletters (in case you missed any):
I hope you enjoyed this newsletter. If you want to chat, email me at firstname.lastname@example.org. As always, happy investing.
Robin Speziale is the National Bestselling author of Market Masters: Interviews with Canada's Top Investors. He lives in Toronto, Canada. Get a copy of his latest book. Click Here.
[Robin Speziale is not a registered advisor. This newsletter does not contain financial advice or stock recommendations. Please conduct your own research and consult a professional.]