Owning Real Estate VS Other Investments - Stock Bonds etc.

[Berubeland]

I'm not sure why but there seems to be a trend for people lately to be absolute in their investments. Funnily enough I'm not sure there's a rule that says if you invest in real estate you may not also invest in stocks or bonds. There is no rule that says this. Yet over and over I hear people say that stocks are bad and real estate is guaranteed.

Most of the successful investors I have known are very financially literate and very comfortable with both kinds of investing. Real estate is simply another vehicle for turning money into more money. One is not better than the other, each kind of investing has advantages and disadvantages.

In all cases buying at the top can erode returns for years to come. The price you pay and when has more to do with amount of return than any other factor. Yet both tops and bottoms are impossible to predict with any degree of accuracy. The best one can say is that an asset seems overbought or oversold. In the case of income producing real estate calculation can predict with a fair degree of accuracy what the return will be unless you are using a more sophisticated and unpredictable technique such as subdividing or severing lots or rehabilitating property etc.

On the other hand with real estate you are much more in control of the investment than stocks. You get to pick where it is, who you rent it to, what improvements you make. You have the opportunity to add value by leveraging your own skills and judgement. You can add sweat equity. It will take time to "manage" this. If you have extra time it can be a very worthwhile "hobby" If you make good decisions it can work out very well, if you make bad ones...well it's not pretty.

With stocks you have no control but it takes virtually no time. You only control when you buy or when you sell. You will never get to pick the location of the next Apple store, or electronic device they manufacture. You implicitly trust the executive of the company to make better decisions that you could. You are also very unknowledgeable about the inner workings of the company. You will only find out when the scandal comes to light and you lose most of your investment.

There are advantages and disadvantages to both methods. My experience is that good investors are good at investing and real estate is part of that. Spotting a bargain on the MLS and spotting a bargain on the TSE require many of the same skills.

Anyways... has anyone else noticed this trend lately or is it just me? Thoughts?

[HaroldCrump]

I'm not sure why but there seems to be a trend for people lately to be absolute in their investments. Funnily enough I'm not sure there's a rule that says if you invest in real estate you may not also invest in stocks or bonds. There is no rule that says this. Yet over and over I hear people say that stocks are bad and real estate is guaranteed.

These are all classic signs of a bubble/market top.
When your cab driver talks about buying dot com stocks (or "investment properties") that is a clear signal that the said market is over-bought and due for some sort of correction or flattening at the very least.

On the other hand with real estate you are much more in control of the investment than stocks.
...
With stocks you have no control but it takes virtually no time. You only control when you buy or when you sell.

Not sure I can agree.
I find the opposite to be true.
I find myself in complete control of my stocks.
I can buy and sell when I want.
I can divide my buys and sells into chunks (tranches).
I can hedge my positions using options and/or other counter-acting positions.
I can control the tax implications.

On the other hand, an "investment property" is one big hulking piece of monolith that you can be "stuck" with.
You can't buy and sell pieces of it.
It is illiquid.
You can't hedge your risks.
etc.

I suppose to each his/her own.

[londoncalling]

I agree with both of the above comments. Most people forget to calculate the time cost of being a landlord. The more you make in your real job the less being a landlord makes sense from a financial perspective. There can be personal benefits (or costs) to being a landlord as well. I think it is how you view being a landlord. I think selecting your investment and the price you pay whether real estate or equities are very similar. With real estate liquidity is definitely an issue. Berube mentions you can screen your tenants and control day to day operations. What you can't control is if a tenant chooses to vacate. Just like a shareholder can't do much if management makes some bad choices that is not necessarily shareholder friendly which can affect share price. There are definitely similarities and differences. I would agree that those that do well in selecting equities are equally suited for selecting real estate. This does not mean that these folks are equally suited to be landlords. Nor do good landlords necessarily make good stockholders(and vice versa). I do think it is important to hold real estate as part of your asset allocation. For some this is home ownership, others rental properties and others choose reits. To each their own. I do like this idea for a thread and am anxious to see others' opinions. I do not see the same amount of posts on other threads with people seeking confirmation of purchasing revenue properties. Perhaps CMF is an anomoly in this regard. I do see people thinking buying property is a great idea even at high prices. It seems that humans by nature tend to get in at peaks and run at lows. The wise investor takes the opposite approach. That being said there is money to be made (and good investments to be found) in any market. Like any investment idea... some are bad... some are good... some require much more thought.

Cheers

[marina628]

We do both and in less than 3 years we bought 4 properties for investment.RE is part of our long term retirement plan ,other than the initial down payment we do not have to pay anything but we have elected to make lump sums and extra mortgage payments.In 2016 /2017 we will have two properties paid off so we plan to purchase two more then so we have some expenses to offset the revenue or we could finish a basement each year and delay purchasing until 2019.Eventually we plan to have 10-15 single family homes for investment.

[Sampson]

Real estate is simply another vehicle for turning money into more money. One is not better than the other, each kind of investing has advantages and disadvantages.

Exactly.

I do agree, I see people taking one extreme only. I think it is a method for finding self-justification. No on wants to make the wrong decision, so they fight voraciously for the strategy they chose. After all, who wants to think that they made the wrong decision.

[the-royal-mail]

What I've noticed is that the typical CMF newbie specuvestor either calls their $640K purchase a home if they're living in it, or an investment if not.

So many people are getting suckered in and falling for the trap being set by artifically low interest rates. I predict a US style housing correction once the govt is forced to start raising rates. Here in CMF we'll be reading all sorts of sob stories from these "investors" (most of whom are carrying excessive debt and have no idea how to be a good landlord) wanting advice on how to get out of their mortgage. Only at that point will they start calling it a house and looking at it in a more realistic light. They will no longer be calling it a home or an investment at that point.

[Four Pillars]

Good topic. I think I'll write an article about it.

The same issue exists with investing styles - dividend investors, active traders, tech traders, passive investors are all different styles which are not necessarily mutually exclusive, but some people certainly take negative views of investing styles (which of course could include real estate) that are different than their own.

[kcowan]

Real estate is attractive because it offers a rare opportunity for high leverage for an individual. During times of high RE inflation, that can work to their favour.

What bothers me is when people underestimate the costs of vacancy, maintenance, property management, tenant screening, et al when considering an investment. Obviously this does no apply to their principle residence. So for someone to buy above their level during periods of high RE inflation may make sense, especially for people who are handy. But they often forget about ongoing costs, like the weekly trip to Canadian Tire or Home Depot, or the high cost of renting money for their mortgage.

But there is a whole industry who is paid to encourage RE investment. How can a few people on a DIY forum compensate for that? We already represent the minority who choose to manage their own investments.

IOW it will always be a problem. Plus there is the strong emotional tie to owning property.

[blin10]

back in 09 when lehmans went bankrupt and nobody knew whats going to happen, in a heart of doom and gloom when USA didn't want to sign 800bill package, when royal bank dipped to $20 a share and noone knew how strong Canadian banks are, houses around my area only lost 10% of the value... I really doubt collapse will happen, might be small correction but you never know

What I've noticed is that the typical CMF newbie specuvestor either calls their $640K purchase a home if they're living in it, or an investment if not.

So many people are getting suckered in and falling for the trap being set by artifically low interest rates. I predict a US style housing correction once the govt is forced to start raising rates. Here in CMF we'll be reading all sorts of sob stories from these "investors" (most of whom are carrying excessive debt and have no idea how to be a good landlord) wanting advice on how to get out of their mortgage. Only at that point will they start calling it a house and looking at it in a more realistic light. They will no longer be calling it a home or an investment at that point.

[Sampson]

^ +1 to kcowan's post.

People often do the same when investing in equities. You often hear, oh, people will be drinking coke forever, whether recession or not.

Well, that doesn't mean Coca-cola can continue growing their sales, and hence the value of their stock. Analysis, whether you believe in technical or fundamentals is crucial.

The danger as you point out with real estate investing IS the leverage. Easier to lose your shirt when owing hundreds of thousands of dollars. I fully agree too many people jump in without knowing what is going on.