Toronto Real Estate Investment VS. The Stock Market : Which is Better Investment?
The theoretical principles of real estate investments and market-traded financial assets are extremely similar, yet they seem to attract fundamentally different investors. Real estate arguably attracts a pragmatic and entrepreneurial investor, while stock market investors seem to be more theoretical and managerial.
Comparing real estate returns with market returns poses certain challenges. Total returns of a financial asset are comprised of capital gains and dividends, but the latter is difficult to estimate in the real estate market. Dividends of a stock are analogous to the Net Operating Income (NOI) of a property .
This chart is a great example proving the above points and showing how real estate holds up in an economic downturn. It is worth noting that historical trends are also teaching us that economic downturns like the great recession we just went through, will continue to happen more, and wreak greater havoc on our markets.
Imagine two people, Mr. Brown and Mr. Johnson, who both inherited $100,000 at the end of the year 1999. Mr. Brown, an educated man and an avid reader of The Wall Street Journal, decides to invest in an Exchange Traded Fund (ETF), which attempts to mimic the dynamics of the Toronto Stock Exchange (i.e. iShares XIU). Mr. Johnson, a common working-class man, decides to buy a $ 228,000 house in Toronto and lease it on a yearly basis. At the end of 2012, Mr. Brown's ETF shares are worth approximately $144,000. In addition, Mr. Brown had been saving the dividends he received over the years in a bank account yielding two per cent interest; he now has roughly $36,000. Ultimately, his $100,000 investment has grown to about $180,000 dollars -- not too bad.
On the other hand, Mr. Johnson just met with his local real estate broker, who appraised his house at $ 497,000 . Throughout the last twelve years, he had been saving his "dividends " (i.e. Cash-flow left after paying all property related expenses) in the same manner as Mr. Brown; he now has roughly $36,000. Mr. Johnson's initial investment has grown to a staggering $533,000 dollars.
When it comes to investing in Real Estate many factors are in play, and if you are planning to make money in this industry then every fact & detail counts.There are people & entities that make a lot of money investing in stocks and then there are those that lose just as much. Remember, for every winner there is usually a loser, WHICH SIDE ARE YOU ON?
As once explained by Pa Bailey in the film "It's a Wonderful Life", home ownership is, "...a fundamental urge. It's deep in the race for a man to want his own roof and walls and fireplace." Unlike most other goods or services that financial assets are based on, real estate responds to an innate desire -- the desire to have a piece of this earth one can call his own. This basic yearning has been, in my opinion, the driving force of the real estate market, and the reason I continue to believe in it.