A common question that I get from a lot of people is, “should they put their savings into the stock market, or should they invest in real estate?”
Canada has the highest percentage of multi-property owners in the world. Not a surprising fact considering the recent performance of the Canadian real estate market.
Let’s dive into the real estate market vs stock market
But is real estate really the best long-term option?
Many financial advisers will argue that if you look at the last 25 years Canadian stocks have seen an average increase of 6.0% per year vs. Canadian real estate values, which have had an average increase of only 4.0% per year. Therefore, the stock market must be the better investment, right?
Not necessarily, as this is not taking into consideration that when you invest in real estate you have the ability to leverage your money through financing.
For example, if you were to invest $100,000 of capital in the stock market you would be able to purchase exactly $100,000 worth of stocks. But, if you were to invest the same $100,000 in real estate, with 75% financing, you would be able to buy $400,000 worth of real estate. If you look at a 25-year forecast for both investments, the $100,000 in stocks would have grown to $429,187 (based on 6.0%/year compounded) and the real estate investment would have grown to $1,066,335 (based on 4.0%/year compounded). That’s a 148% higher return for real estate (assuming the property had a tenant). You can leverage yourself in the stock market as well but this is not a common practice for the average investor and can be quite risky.
In fact, if you purchase an investment property that just breaks even (covering your mortgage & operating expenses) and should that property appreciate at only 3% per year then you should see at least 15% annual return on your investment! If you were to purchase a property that is cash flow positive then you can see annual returns upwards of 20%. Below is a chart running a 25-year analysis on a sample rental property listed at $459,900.
As you can see from the analysis above real estate has the higher average return on investment.
Now, I know a lot of people are going to say “With real estate you’ve got mortgage payments, you’ve got property taxes, and you’ve got maintenance.” But in a really strong rental market like Guelph, where we’ve got less than a 1% vacancy rate, you should have no issue renting. The rent should cover your mortgage as well as your taxes & gives you enough money for maintenance costs.
Real estate is the number-one asset class for long-term stability. When you look at the stock market, in correction it is fairly easy for some stocks to go to zero. Real estate’s a tangible asset. It’s never going to go to zero. It’s always going to have a use. You only lose money on real estate when you sell it in a down market. If you’ve got a house that is covering itself, you should have no need to sell it when the market’s down. You should be able to hold it until the market recovers and sell it at an advantageous time.
We think as an investor it’s really important to diversify where you put your money. You should have money in the stock market, but also definitely should be invested in the real estate market as well. If you have more questions about the Real Estate Market vs Stock Market feel free to get in touch with our team.
Request an up to date list on the top investment properties in Guelph!
