Blog by Mary Cleaver

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January 2012 - Real Estate As An Investment

Q: My question is about real estate as an investment. With the high cost of property in Vancouver, why should I buy a condo when I can rent? I can put the money I would’ve spent on a down payment in the stock market.
To see this question answered on video, click here  http://www.youtube.com/watch?v=o5klf_7kirg 
A:  I asked a similar question of my REALTOR® five years ago. I had purchased a two-bedroom condo in Fairview in 2003. In 2006, my then financial advisor suggested that if I sold the property and gave the profit to him to invest on my behalf, that I could do very well. I liked the idea because I knew the value of my home had appreciated substantially in those three years, and it made some sense to me to “lock in those profits.”
I called my REALTOR® to ask his opinion. He reminded me that Vancouver real estate prices rise over time and that if I got out of the market, prices could well increase to the point that I wouldn’t be able to get back in. He advised me to hold onto my investment – my home – and said, “real estate will always stand you in good stead, Mary.” His advice was worth a lot because I would have listed with him. He had nothing to gain by convincing me to stay put. Incidentally, this experience was pivotal in my life because I was inspired by his unselfish counsel to aspire to a career in real estate for myself.
I didn’t sell my apartment at that time. Instead, I sold it three years later. The profit along with the equity realized from paying the mortgage over six years allowed us to purchase a townhome large enough to house our family of three with a baby on the way. Meanwhile, the stock market had been sent for an absolute loop with the financial crisis in late 2008, and while I lost some money, I was glad not to have had all my eggs in that basket.
I had a debate with someone in the banking industry recently who doesn’t share my view that Vancouver real estate is the best investment, given the price increases of the last several years. He believes that the market is over-valued and there is more money to be made in the stock market for savvy investors. He cited the fact that the collective value of the TSX increases over time, just like the value of property does.
Here is why real estate wins. Almost without exception, every property in Vancouver that was purchased five years ago is worth more today – condos, townhouses, and detached homes­ in almost every area. The same cannot be said for individual stocks on the TSX. Some have gone up exponentially and others have gone to zero. Even sophisticated investors make mistakes, and most of us are not sophisticated investors. It is worth noting that for all investments, including real estate, we are wise to invest for the long term.  
There is another factor that tips the scales in favour of property ownership as an investment vehicle. When we buy a home, we commonly come up with the down payment and borrow the rest. Currently, this borrowed money is offered at extremely low interest rates. The upside is that the value of your investment is the entire purchase price, not only the dollar figure that you actually invested, and it is that entire purchase price amount that appreciates over time.
I’ll go back to my experience for an illustration. I purchased my $300,000 strata unit with $30,000 down, plus $5000 in closing costs. My investment of $35,000 made me close to $200,000 in six years because it was the value of the property that was appreciating, not the dollars I put in from my pocket. I don’t include the monthly payments as part of my investment because I consider those payments to be the cost of a roof over my head. I would have paid a similar amount of money in rent had I not owned. The key point here is not the exact dollar figure I made in a relatively short time. We may see slower growth in condo prices in the next few years. I don’t know and neither does anyone else. But whatever the percentage of growth is year over year; that percentage is based on the investment’s entire value. The case becomes more compelling still when you factor in the incentives offered by the federal government for first-time home buyers (which I’ll cover in detail in a future column), as well as the fact that there is no capital gains tax on any profit made from selling your principal residence.
All this investment potential is, of course, in addition to the pride you feel in home ownership, the knowledge that you cannot be evicted, and the stability of your monthly cost of housing if you lock in to a fixed-term mortgage. Home ownership offers incalculable benefits unrelated to property as an investment.
While none of us can predict with certainty the way markets will behave over a given period of time, clearly the past is our best indication of the future. I’ve invested in mutual funds and individual stocks for close to twenty years. I’ve worked with Scotiabank, Sun Life, and Jennings Capital on those investments. I’ve also owned three principal residences over a similar timeframe. I have made more money in real estate than with any of my other investments.  It’s not even a close contest.
My story is only one example. Think about the people in your life and ask them about their experience. I talk to friends, family members, and clients about financial matters frequently and I don’t know anyone who has added more to their net worth by investing in mutual funds or individual stocks than they have by investing in their own homes.
Do you?
Q: My question is about real estate as an investment. With the high cost of property in Vancouver, why should I buy a condo when I can rent? I can put the money I would’ve spent on a down payment in the stock market.

A:  I asked a similar question of my REALTOR® five years ago. I had purchased a two-bedroom condo in Fairview in 2003. In 2006, my then financial advisor suggested that if I sold the property and gave the profit to him to invest on my behalf, that I could do very well. I liked the idea because I knew the value of my home had appreciated substantially in those three years, and it made some sense to me to “lock in those profits.”
I called my REALTOR® to ask his opinion. He reminded me that Vancouver real estate prices rise over time and that if I got out of the market, prices could well increase to the point that I wouldn’t be able to get back in. He advised me to hold onto my investment – my home – and said, “real estate will always stand you in good stead, Mary.” His advice was worth a lot because I would have listed with him. He had nothing to gain by convincing me to stay put. Incidentally, this experience was pivotal in my life because I was inspired by his unselfish counsel to aspire to a career in real estate for myself.
I didn’t sell my apartment at that time. Instead, I sold it three years later. The profit along with the equity realized from paying the mortgage over six years allowed us to purchase a townhome large enough to house our family of three with a baby on the way. Meanwhile, the stock market had been sent for an absolute loop with the financial crisis in late 2008, and while I lost some money, I was glad not to have had all my eggs in that basket.
I had a debate with someone in the banking industry recently who doesn’t share my view that Vancouver real estate is the best investment, given the price increases of the last several years. He believes that the market is over-valued and there is more money to be made in the stock market for savvy investors. He cited the fact that the collective value of the TSX increases over time, just like the value of property does.
Here is why real estate wins. Almost without exception, every property in Vancouver that was purchased five years ago is worth more today – condos, townhouses, and detached homes­ in almost every area. The same cannot be said for individual stocks on the TSX. Some have gone up exponentially and others have gone to zero. Even sophisticated investors make mistakes, and most of us are not sophisticated investors. It is worth noting that for all investments, including real estate, we are wise to invest for the long term.  
There is another factor that tips the scales in favour of property ownership as an investment vehicle. When we buy a home, we commonly come up with the down payment and borrow the rest. Currently, this borrowed money is offered at extremely low interest rates. The upside is that the value of your investment is the entire purchase price, not only the dollar figure that you actually invested, and it is that entire purchase price amount that appreciates over time.
I’ll go back to my experience for an illustration. I purchased my $300,000 strata unit with $30,000 down, plus $5000 in closing costs. My investment of $35,000 made me close to $200,000 in six years because it was the value of the property that was appreciating, not the dollars I put in from my pocket. I don’t include the monthly payments as part of my investment because I consider those payments to be the cost of a roof over my head. I would have paid a similar amount of money in rent had I not owned. The key point here is not the exact dollar figure I made in a relatively short time. We may see slower growth in condo prices in the next few years. I don’t know and neither does anyone else. But whatever the percentage of growth is year over year; that percentage is based on the investment’s entire value. The case becomes more compelling still when you factor in the incentives offered by the federal government for first-time home buyers (which I’ll cover in detail in a future column), as well as the fact that there is no capital gains tax on any profit made from selling your principal residence.
All this investment potential is, of course, in addition to the pride you feel in home ownership, the knowledge that you cannot be evicted, and the stability of your monthly cost of housing if you lock in to a fixed-term mortgage. Home ownership offers incalculable benefits unrelated to property as an investment.
While none of us can predict with certainty the way markets will behave over a given period of time, clearly the past is our best indication of the future. I’ve invested in mutual funds and individual stocks for close to twenty years. I’ve worked with Scotiabank, Sun Life, and Jennings Capital on those investments. I’ve also owned three principal residences over a similar timeframe. I have made more money in real estate than with any of my other investments.  It’s not even a close contest.
My story is only one example. Think about the people in your life and ask them about their experience. I talk to friends, family members, and clients about financial matters frequently and I don’t know anyone who has added more to their net worth by investing in mutual funds or individual stocks than they have by investing in their own homes.
Do you?