Most people don’t consider real estate to be an investment which generates return and income, they think of it as a home. However, for most people the single largest investment they make in their lives is a piece of real estate, and it will likely comprise a third of their net worth. This is part of what makes real estate a unique investment market, that there are two kinds of buyers. An ideal real estate market for home owners and an ideal real estate market for investors would probably look quite different. Investors are interested in either very long run strategies with tenancy and heavy capital expenditure or fairly short term strategies centering on flipping properties. Home owners are interested in owning their home.
But what makes real estate a ripe ground for investment? Home owners invest because they want to build equity and not squander on rent (though this can be a foolish reason). There is also a substantial amount of cultural pressure to own rather than rent. Investors, however, might have better options though. The credit crunch in particular might have made it seem as if real estate was a pipe dream investment. It may seem difficult to see why investors are interested in this market then.
The great recession of 2007 did much to wipe out the short term strategies of real estate investors, it’s true. A common short run strategy was to buy condos on pre-construction sales and flip them once the development had taken off and retailers had moved in nearby. Even without extraordinary circumstances like a housing market crash, these bets can have some long odds since they depend not only on the future evaluation of a property – which one can hedge against and be wise in selecting appropriate properties – but also on the successful completion of the condo project, which can be unpredictable).
Still, the recession never did stop everyone from making money in real estate. Mostly it just changed the situation from housing markets basically giving investors and homeowners free money simply for having their name on a mortgage to one which once more required expertise and shrewd decision making. Real estate then is like any other investment in that it needs to be done in a cautious, risk-managed way.
It can still be argued that there are better investment options than real estate. Opinions and mileage actually vary. One thing most probably wouldn’t disagree with is that real estate is usually a decent exercise in wealth storing if not wealth generating. Buildings are not the most fungible commodity, but generally speaking they are one of the safer places to store value barring a few extraordinary macroeconomic events which don’t tend to tarnish prices much if you’ve picked the right area. Owning real estate also has tax benefits vs. owning stocks and there are rent returns to consider as well.
Real estate also allows you to be creative. You can’t buy stocks on credit with low starting funds and have someone else pay the outstanding while you earn tax rewards. You also can’t take stock, redivide it into smaller condo units and resell each individually for a profit. With stocks, there can be as many as 30 or 40 people between you and your money. In the case of residential real estate there are two people, and generally speaking you’re the expert at the table. Picking a good piece of real estate to invest in involves a variety of considerations ranging from the macro to the micro, and the expectations of the investor. Cash flow properties in commercial real estate can generate substantial short term profit while residential properties can see explosive gains in value depending on local variables, making them a long term bet with short term perks. Both can be valuable additions to a portfolio, though there are caveats.
Canada’s real estate market is widely considered to be overvalued by a slew of highly regarded publications and economists. A symptom of this phenomenon was the residential real estate price crunch in Vancouver about two years ago, which was hardly surprising to anyone. Vancouver is or was the hottest property market in Canada with some of the least affordable housing anywhere in North America. As those prices continued to rise while interest rates failed to, bidding wars ensued over residential properties involving naïve would be homeowners and quite a few of those lost their shirts in the end.
Thankfully, the drop in Vancouver home prices was more of a measured cooling than the bottom falling out of the market. Toronto real estate is still red hot to this day in comparison, and the readjustment is expected to happen soon as the bubble bursts. Bubbles are wildly profitable to ride in the short run, especially if they deflate slowly and deliberately as the housing markets in Canada tend to. This is another advantage real estate has over many other kinds of investment in general; housing prices are sticky enough to make a quick escape possible in many cases.
Of course there are more robust real estate markets in Canada as well for those not looking to live life in the fast lane. Montreal housing prices, for example, are usually increasing, but not alarmingly, so that it’s generally a rock solid bet that Montreal condos will appreciate modestly in the coming years without too much fuss.
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Sophie Tardiff is a freelance writer who enjoys writing about economic trends. She is currently spending her summer writing about the Montreal condominium market.