Real Estate vs Stocks: What is the Right Fit for Your Portfolio?
Everyday in Canada individuals invest in real estate and stocks with the objective of growing their investments in order to achieve their financial planning goals. Buying stocks gives you a percentage of ownership of a business. Your overall return will be comprised of the value appreciation of the company’s stock (capital gain) and dividends. When you invest in real estate you acquire physical property. Real estate investors make money by collecting rents and capital appreciation as the property’s value goes up. Additionally, real estate is most often leveraged making it possible to expand your holdings.
Real estate vs Stocks: what are the returns you can expect?
Unfortunately, there is no scientific way to assess individual investment property returns on a larger scale. From a historical and comparative perspective stocks have increased in value more than real estate. Over long term the S&P 500 index has historically produced total returns in the range of 7–10% and during the same market cycle real estate prices tend to barely outpace inflation. Another characteristic with real estate is that there can be a long period of time with very little to no growth and then subsequently followed by growth spikes. All that being said, the three hidden benefits to owning real estate are:
- Over the long term, real estate can produce strong returns because they can generate rental passive income.
- A significant amount of leverage can be used without adding a large amount of incremental risk.
- Adding real estate to your investments creates diversification in your holdings.
What are the advantages and disadvantages to real estate investing?
The two most prominent advantages to real estate investing are the ability to leverage your investment with a mortgage and the numerous tax benefits. Depending on the type of real estate investment, and if the mortgage is insured, you may be able to borrow up to 95% of the investment. What leverage does is increase the potential return on the investment. Some examples of the tax benefits are being able to depreciate the building and the interest expense, both of which are tax deductible. Real estate is also an excellent hedge against inflation, can provide long-term cash flow passive income, and capital appreciation.
When investing in real estate you may want to consider the high transaction costs, that it is illiquid, and does require more work than buying stocks. A common error that real estate investors make is that they do not consider their time that goes into managing the property, repairs, and maintenance when analyzing the profitability of a real estate investment.
What are the advantages and disadvantages to stock market investing?
For the most part, investing in stocks is simple, highly liquid, and can be done with low transaction fees. You are able to add stocks to tax-advantaged retirement accounts (example TFSA) and given that there are so many stocks to choose from constructing a well-diversified portfolio is much easier.
Stocks tend to be more volatile given that they are highly liquid. In some circumstances there is the potential for emotion-driven investing that usually come in the form of panic selling. Lastly, with the advancement of technology there has been a massive amount of information that is available to investors that in many cases makes it difficult to separate the news from the noise.
Who can help in determining the right asset allocation for your portfolio?
Finding the right balance of investing in real estate and stocks can be complex as there are many variables to consider. That being said there are resources that you can use. A financial professional with experience in comprehensive investing would be able to evaluate your personal situation and determine the right asset allocation that works best for you.