Real Estate Investment vs. the Stock Market?

Many investors ask themselves what is safer, real estate or the stock market. I have had friends that invest in bank or blue chip stock and quake in their boots every time they hear about instability in the market. Yet some get nervous when they think of increased interest rates or a potential bubble in Canada and wonder if they should sell their investment property in Toronto. It’s a constant battle; what is the better investment, real estate or the stock market?

Some investors believe that there is stability in Europe now that the trillion-dollar bail out is in effect and the markets are expected to recover. Even the US has shown some positive financial signs recently and is on its way to getting the economy back on track. Through the application of technical, or fundamental analysis we can assess whether a stock’s book value, PE ratios or price is in sync. However what happens when the analyst’s projections are not met or the media creates mass hysteria and investors panic? The reality is that very few can truly understand the complex dynamics of the stock market so they give their hard earned dollars to brokers, fund managers; financial planners or they simply buy bonds. Is there another option and if so, what would be the advantages?

As a property manager and a real estate investor in the GTA, we have seen many investors play the real estate game and win (and lose) but mostly prosper with the right perspective and profile. Lets compare both investment options:

Liquidity

Stocks are very liquid and Real Estate is not. Once you prepare your investment for sale, sell it and then wait for the closing you are looking at 90 days minimum before getting your return. Both investments are subject to market volatility – stocks are historically more so.

Flexibility

Other than zoning rules and government regulations, you control where you buy, what tenants live in your property, who property manages your investment and what improvements are made. With stocks you have little control over the company’s actions and unless you attend the annual general meeting, you don’t have much of a voice.

Management

Stocks are a more passive investment. You purchase the stocks, sit still and wait. With Real estate, unless you hire a property manager, you are responsible for managing the property, paying bills, securing tenants and keeping up to date with tenant and landlord rules.

Cash flow

Some stocks and most bonds provide dividends. The payout is typically marginal and only if you invest quite a significant amount of money will the dividend payout be substantial. With Real Estate on the other hand, cash flow is King. There are pockets in the GTA as well as throughout Canada where for a modest investment; you can begin to acquire significant cash flow. This will also come not, semi-annually or when the stars align, but on a monthly basis.

Return

With real estate your investment is basically the down payment, legal fees and land transfer tax. With stocks your investment might include the stock price plus any trading fees from the brokerage. However, with real estate, your return is based on the full property value. If you invested $100k in a $400k property, and real estate went up 5%, that is 5% on the $400k. That means you increased the value of your portfolio by $20k. With stocks the return might be stated higher, but it is based on your investment only.

Timing

Both investments can be difficult to predict significant upswings. Unless you are an expert in the field, trying to time the market can have serious consequences. Media hype, market crashes or political instability can have an impact on either stocks or real estate so you need to have a long-term outlook and a solid team of professionals helping you.

So, which is the better investment? For some, the benefits of real estate far outweigh the lack of liquidity. For others, stocks offer a passive investment for their hard earned income. The choice is personal and should be based on your investment profile. For stocks, have a trusted investment advisor assisting you. For real estate, find a real estate agent, accountant, lawyer and property manager who understands investment real estate in your community and works with your investment goals.

Mekler Property Management offers property management services in the Greater Toronto Area. For more information please visit us at www.Mekler.ca – We help you be a landlord without being the landlord!