Stocks or Real Estate? My Answer and Reasoning

Stocks or Real Estate?
Stocks or Real Estate?
For me, the answer was stocks.

A few days ago, a friend was visiting, and she remarked that I had the same real estate investing book on my shelf as she has on hers. Neither of us has ever invested in real estate, other than the houses we live in. (I don’t consider a primary residence an investment because my family and I need a place to live – but that, as they say, is a topic for another post.) She knows I that invest in stocks, and she asked why I had chosen stocks over real estate. Here’s the answer.

Real estate

First, some context: When I was considering investing in real estate, it was the heady days of the unprecedented run-up of house prices of the previous decade. At that time, it seemed that any idiot could make tens, if not hundreds, of thousands of dollars by buying, and then re-selling in six months. People told stories about when there wasn’t a bidding war, bidding wars having become the rule, rather than the exception. The number of TV “personalities” who were making money hand over fist seemed to grow weekly. In short, real estate was the place to be for investors looking for a quick return. Obviously, the ever-increasing price (notice I didn’t use the word “value”) could not continue indefinitely; somebody was going to be left holding the bag. That timing-specific reason aside, here’s why I decided not to get involved in real estate investing:

  • even a small house (or condo) is a huge investment into a single asset. If I had invested in real estate, I would have been all in, and that would have made it hard to sleep at night.
  • a house is a complicated, interwoven whole, and problems that get neglected or worse, hidden, by the previous owner, can cost a buyer a lot of money not to improve the house, but to bring it back to what he thought he was getting in the first place. Sellers are highly motivated to hide shortcomings with their property, and this kind of behaviour is hardly unknown. An owner may be willing to live with certain compromises in the proper functioning of their house, but renters usually aren’t, which could mean significant additional expenses just after having bought the house – or at unpredictable times in the future.
  • periods of vacancy can turn an investment into a money pit very quickly.
  • mistakes can be expensive. Whether you buy in the wrong neighbourhood, make the wrong improvements to the property, or rent to the wrong tenant, mistakes can cost you a lot of money very quickly.
  • interest rates rule your life. Rates have to go up some time, and when they do, re-mortgaging will be a slap in the face for current real estate investors; I hope they’re enjoying the current ride!
  • through abuse or neglect, a tenant may cause thousands of dollars of damage. If an investor has several rental units, this risk is spread out, but if he just has one, he is placing a large part of his financial well-being in the hands of someone who has a lot less skin in the game.

Note: The book my friend saw on my shelf was Real Estate Investing In Canada by Don Campbell. Here’s a link to his blog.

If I had invested in real estate, I think I would have done OK. The market I’m in has stood up quite well over the past few years, and there is a net inflow to both my city and my province, so prices will probably stay strong for the foreseeable future. Even so, there would have definitely been some stomach-churning times over the past several years. I’m glad I decided to go into stocks instead. Here are some of the main reasons:

Stocks instead

  • much smaller initial investment. With stocks, you can dip your toe in the water, and then decide whether or not to keep going, and how quickly. Likewise, you can withdraw from the market to a degree, and at a time, of your choosing.
  • diversification is much easier and cheaper to achieve. Buying small amounts in five companies sits better with me than buying all of one house. It just does.
  • stocks come with a built-in management team. Obviously, companies make missteps from time to time, but large, well-entrenched ones don’t make a lot of mistakes. When they do, they are usually able to dig themselves out again. Senior management gets paid a lot of money to steer the ship, and they know a lot more about running their business than I do. (If I find I disagree, I can quickly and easily sell my shares; selling quickly isn’t so easy with a house.)
  • income can be produced right away. By buying dividend paying stocks, I can generate a cash flow immediately, with a lot more modest initial investment.
  • rising dividends provide a hedge against inflation, the same way rising rents can.
  • dividends are taxed more favourably than rental income.
  • the stock market allows for a variety of investing goals and strategies. Initially (and still true today) I was looking for a safe, steady-eddy source of income that would grow over time. Later, when I’m in a more stable financial situation, I may decide to take a few more risks in search of larger returns. As a stock investor, I can choose, and if I wish, change, my risk-reward profile for part or all of my portfolio relatively easily.
  • dividend-paying stocks can be used as a safety net. In good times, dividends should be re-invested regularly. In bad times, I have the option of using that income to support myself, if necessary.

I’m sure that after reading these points, the stock market people are feeling pretty smug, and the real estate crowd is howling, but as I said, these are just my own reasons for choosing stocks over real estate investing. I’m not saying that I’ll never invest in real estate, but I’m quite happy that I made the decision that I did. Until my friend asked me about it, I have to admit that I hadn’t questioned the decision since I initially made it. That must be a good sign, right?

 

 

4 thoughts on “Stocks or Real Estate? My Answer and Reasoning”

  1. Years ago, before we moved into our new house, I considered keeping our existing home as a rental property. Then I realized I can’t even keep my own house properly maintained so I know I’d have issues being a landlord and having to keep up a second home.

    Stocks are more for me, but that said, most of my net worth at this point in my life is in home equity.

    1. Hi Robb,
      Yeah, stocks, when bought for the long term, are a lot less day-to-day hassle for sure.
      Another point: if you’re comfortable with leverage, you can use the equity in your home to invest in stocks, so it doesn’t have to be an either/or proposition question between paying off a house or investing in stocks. At this point, I’m not ready to do this; I want to have more of the house paid off first, but some day…
      Jeff

  2. This is the fence I am sitting on now. Stocks or real estate?
    I am in my late 40s and need to jump start my retirement savings and a rental property sounds like the way to go even with the potential for leaky roofs and tenants who skip town owing rent.

    I am afraid of spending so much money in one place on a rental. My money is spread between a RRSP mutual fund and individual stocks in my TFSA. Neither will make me rich or help me to retire early.

    I want to make a sensible business decision and not let fear of spending so much money colour my decision.

    1. Hi Jane!
      I just left a comment on your blog, solvingthemoneypuzzle.com which actually addresses your comment here, and your post there. I wanted to leave a link to this post, but in the end, I decided not to, because I didn’t want you to think I was commenting just for a backlink! I’m glad you found this post on your own.
      The books that set me on the path to dividend investing were “Stop Working” and “The Lazy Investor” by Derek Foster. They (along with his subsequent books) are self-published. You can get them in many libraries across the country, or directly from him on his website, stopworking.ca You should know that he talks about Income Trusts, which are no longer an option, but the principles he discusses are still sound.
      Foster “comes clean” and admits in one of his later books that he was heavily leveraged at times to achieve his status of “Canada’a Youngest Retiree” so I’m not suggesting these books are a direct and easy path to financial Shangri-La, but they do do a good job of familiarizing you with dividend investing, if you’re not already.
      Also, just to be clear, these are the books I started with, but I’ve read a bunch more since then; I recommend these only as an excellent starting point.

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