Real estate vs. stocks: which one should you invest in?
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Updated: January 23, 2024
When I was 27 years old, I bought a tiny one-bedroom Toronto condo. It was small but expensive: sitting at the top of my budget, I scraped together a meagre down payment and borrowed from my RRSPs to make the purchase. I rationalized it as an investment and that I was taking my first step on the property ladder.
Fifteen years later, I question my choice. To make the purchase, I had to borrow from my RRSP and couldn’t afford to invest for several years. But at the time, I figured buying real estate was a solid investment, whereas stocks were “riskier.”
Apparently, I’m not the only one dealing with the “stocks vs. real estate” debate. According to an Ontario Securities Commission study, Millennials may be putting off investing because they view saving for a down payment as a more urgent priority. Sixty-eight percent of millennials who don’t invest said they have “other financial priorities,” and 56% of non-homeowners place homeownership in their top three financial priorities. A recent KPMG poll found that 42% of Millennials are putting their retirement savings on hold to pay off or down their mortgage.
Furthermore, many Millennials see investing as “riskier.” Fifty-seven percent of Millennials who don’t invest said one of the reasons is that they are worried about losing money in the financial markets. Homeownership may be perceived as a more secure investment, with that same KPMG poll finding that 78% of Canadians said homeownership is an investment for financial stability in retirement.
So, it begs the question: should you invest in real estate or stocks? There’s no simple answer, but as someone who has done both, I’m doing a deep dive into this question and getting answers from leading experts.
Real estate vs. stocks: an overview
Before diving into the data, let’s cover the basics.
With real estate, you are buying physical land or property, such as a detached house, apartment, vacation property, commercial building, or even a vacant lot. In general, the value of a real estate property appreciates over time, offering a potential return on investment if you decide to sell in the future.
In contrast, buying stock means purchasing a piece (or “share”) of a company. So, if you own 20,000 shares in a company that has 1,000,000 shares outstanding, you’d own 2% of the company. Like real estate, as the value of the company’s shares appreciates, so does the value of your stock.
Real estate vs. stocks: returns
Both stocks and real estate are worthy places to park your savings. But here’s the short answer: investing in stocks is generally the more lucrative option.
“Over long time periods, stocks beat the price appreciation of real estate, even when looking at stellar markets like Vancouver and Toronto,” says Andrew Hallam, a financial expert and author of the best-selling book, Millionaire Teacher.
Historically, stocks tend to increase in value more quickly than real estate, as well as produce higher than average annual returns. Case in point: the S&P 500 index fund has historically produced total returns in the 9% to 10% range. Likewise, the Canadian stock market provided an average annual return of approximately 10% from 1970 through 2015. Meanwhile, Canadian real estate prices have only increased by about 5.35% per year over 10 years (ending December 31, 2019).
“Several studies on global housing have shown that investing in real estate beats inflation by around 1.3% per year,” says Robb Engen, a fee-only financial advisor and co-founder of the personal finance blog Boomer & Echo. “While investing in stocks beat inflation by around 6% per year.”
This 2018 comparison study by RBC Global Asset Management breaks it down nicely. National price data from the Canadian Real Estate Association shows an average annual gain of 4.5% nationally from 1993 to December 31, 2018. The hot markets in Toronto and Vancouver did slightly better, seeing returns just above 5%. Meanwhile, the comparable average return from stocks was 8.3%.
I could go on, throwing more numbers and data at you to show that sinking your savings into stocks historically fetches a higher return compared to real estate. But there’s more to consider with this choice, so let’s move on.
Is buying a house an investment?
It depends. Unless it’s a rental property, experts warn against seeing a home purchase as an “investment.” If you’re buying a house for lifestyle purposes, it’s not really an investment.
“When you buy a home to live in, that is not an investment,” says Hallam. “That’s shelter. Even when the value of that shelter rises, the person still needs to live somewhere. So if they sell their home at a profit to buy a home across the street, they’ll pay a proportionately higher price for that new home as well.”
Very true. I started out with a $250,000 mortgage for my tiny apartment, and fifteen years later, it’s ballooned into an $870,000 mortgage for a detached house. Yes, I leveraged the profit from the resale of my apartment to buy a larger house, but I’ve also created a bigger debt.
“Real estate should only be considered an investment when we’re talking about the second home, third home, fourth home, etc.,” says Hallam. “People who view their residential homes as investments run the risk of a rose-coloured perception. Your home can’t put food on your table if you live in that home and don’t at least rent part of it.”
In reality, there are a few different ways to invest in real estate. You can purchase a property with the intention of flipping it or even buy a vacation property. Looking back at the stats on inflation referenced earlier, Engen notes that those numbers for housing “reflect capital appreciation only.”
“If you add rental income into the mix, the real estate investing returns were much closer in line with stock returns,” says Engen.
However, buying an income property isn’t a sure-fire strategy to go from rags to riches. Unless you’re psychic, there’s no way to know 100% whether you’ll come out ahead or fall flat.
“If people choose to buy a second or third home for investment purposes, they can leverage the returns by borrowing the money and have renters pay the mortgage,” says Hallam. “When doing so, there’s no way of knowing whether real estate will beat stocks or whether stocks will beat real estate. Anyone who says they can see the future (with respect to this question) is either crazy, deluded, corrupt or all three.”
So, don’t buy a house? Is that what you’re saying?
No! If becoming a homeowner is a life-long goal, you shouldn’t feel guilty about that. On the flip side, there’s also nothing wrong with renting instead of buying (despite what your parents might say). It’s a deeply personal choice.
“Personal finance is personal,” says Hallam. “Ask, ‘What are we trying to achieve?’ Maximizing money for the sake of maximizing money makes little sense. We know that money itself doesn’t make us happy. But it can be a tool that enhances life satisfaction.”
My life-long dream was to own a heritage home with a big backyard. That being said, this could’ve been attained by renting. But it’s also about how I feel about the choice.
“Many people try to see the future and ask, ‘Is it financially better to rent and invest the difference in the stock market or is it financially better to buy the home?’” says Hallam. “That’s unanswerable, without a working crystal ball. But you might find an answer to the question, ‘How would it make you feel to own versus rent?’ How we feel is always important. Too many people get lost in the ‘What will enhance my wealth?’ question.”
Despite all the data, there’s no “right” answer in this debate. Whether you decide to buy real estate or stock depends on your lifestyle preferences, financial goals, resources, and risk tolerance.
“We should never forget to use money as a tool to enhance our life satisfaction,” says Hallam. “That sometimes means using it in ways that don’t boost our wealth.”
Pros and cons of buying real estate
What are the benefits and downsides of buying real estate or stocks? Here are some key considerations.
The Pros of buying real estate
Long-term appreciation
The value of your home will likely appreciate over time. So, if you hold onto your home for a prolonged period, there’s a good chance that you’ll be able to sell it for more than the purchase price.
The power to leverage
In real estate, “leverage” refers to using borrowed money to invest in a property. When “leveraging a property,” it means borrowing money from a lender (like a bank) so that you can purchase real estate without having to cover the entire cost yourself. The idea is to use the lender’s money first without depleting your own savings. But how exactly is going into debt a good thing? There are a few advantages to this approach:
- It allows you to purchase property that you can’t afford. For instance, you may not have $1M cash to blow; but you may qualify for a $750,000 mortgage and can use $250,000 of your own savings to buy a home in Toronto or Vancouver.
- It allows you to maximize your returns. If your mortgage interest rate is 1.75%, but your home appreciates 4.5% in a given year, that’s a 2.75% gain. Of course, there are no guarantees on an annual return and interest rates could increase. Also, factor ongoing maintenance costs into the equation.
- The initial investment is relatively small. In Canada, you only need a minimum of 5% down payment to buy a property. In my case, I put down just $12,500 to purchase a $250,000 property, which I sold five years later for $319,000.
Essentially, taking on “good debt” (like a mortgage) can be an effective way to grow your wealth (provided that you act responsibly).
Possible passive income source
In the era of Airbnb and VRBO, renting out your home has never been easier. As a homeowner, you could bring in extra bucks by renting out the basement suite or your whole house to offset the mortgage. Once the mortgage is paid off, you can still continue to collect rent and earn a passive income from your property.
Secure investment
In general, real estate has generated inflation-beating rates of return, but with much less volatility than the stock market. Buying property can also diversify your investment portfolio and help manage your overall risk without giving up potential returns.
Personal enjoyment
Possibly the biggest benefit of homeownership is the comfort it can provide. Hallam shares an example from his own life: “My wife and I bought a condo in Victoria. We spend most of every year outside Canada, and we leave the condo vacant. Yes, that’s a ‘bad investment’ on several levels. But money is a tool that (if we spend it right) enhances our lifestyle. When my wife and I visit friends and family in Victoria, we have our own condo to stay in. It’s a place that gives us comfort.”
Does owning a home give you joy? Take your happiness into consideration.
The cons of buying real estate
Sky-high prices and bidding wars
If you’re shopping in the hottest real estate markets in Canada, expect to encounter bidding wars, bully offers, and soaring prices. Now, real estate wars are even extending to the suburbs and cottage country. Meanwhile, buying stocks is easy and affordable when using an online brokerage or turning to robo-advisors.
You need a down payment
To get into the real estate market, you’ll need to put down a minimum of 5% of the purchase price. Plus, if your down payment is less than 20% of the price of your home, purchasing mortgage loan insurance will also be required. In contrast, you can actually start investing with just a little bit of money.
It can add to your debt load
Unless it’s a cash purchase, buying a home usually involves getting a mortgage, which is a type of loan. It adds to your debt ratio, and if you can’t repay it on time, the mortgage lender can repossess your property. Investing in stocks is the opposite: with every payment, you’re building wealth and growing your net worth.
It’s a money pit
Aside from mortgage payments, real estate typically comes with extra costs (or “holding costs”), such as property taxes, condo fees, utilities, insurance, and property maintenance.
“Yes, real estate is tangible and it’s easy to understand,” says Engen. “But there are a ton of hidden costs that come with homeownership that often get overlooked. Buying a property without factoring in how it fits within your overall budget and future goals is a recipe for disaster.”
Generally speaking, homeowners should budget 1% to 3% of a home’s value each year for ongoing maintenance and repairs. That’s a lot of money that could be otherwise invested into a TFSA or RRSP.
It’s a hassle
Whether it’s dealing with snow removal or a basement flood, houses come with headaches and unexpected bills. Plus, if it’s an income property, you’re signing up for a second job.
“When buying a real estate investment, you are buying a business,” says Hallam. “This always includes a PITA (“Pain In The Ass”) factor, such as when you get a bad tenant, can’t find a suitable tenant, or when the home requires significant maintenance. Businesses require work. Real estate is no exception.”
Pros and cons of buying stocks
Like buying real estate, investing in stocks has its own set of pros and cons. Here are a few key considerations.
Pros of buying stocks
Superior average annual returns
As discussed, stocks tend to increase in value more quickly, as well as produce higher than average annual returns than real estate.
“Stocks have been the best performing asset class throughout history,” says Engen. “The advantage of investing in stocks includes the ability to participate in the future earnings of companies (both foreign and domestic) through low-cost and diversified investments (mutual funds or ETFs).”
Getting started is easy
Homeownership can be time-consuming and costly, whereas owning stocks doesn’t require much work. Plus, getting started investing is a cinch.
“New tools and platforms are available now that make it easy and accessible for anyone to invest in a risk-appropriate manner,” says Engen. “Robo-advisors automate everything for you, and discount brokerage accounts make it simple to build your own low cost, diversified investment portfolio.”
It’s cheap
No need to save for a substantial sum to get in the game. Thanks to “FinTech,” anyone can start investing with a few hundred bucks and the fees are minimal. For instance, robo-advisors primarily invest in low-cost ETFs and usually charge less than 1% in fees. Alternatively, you can go the DIY investing route with an online brokerage that charges rock bottom trading fees. In fact, some even charge $0 in trading fees.
Liquidity
If you need fast cash, you can easily sell your stocks, whereas selling real estate can take days, weeks, or even months.
Easy to diversify
With real estate, you’re (likely) committing to one property in a fixed location. But with stocks, you can purchase a piece of ownership in hundreds of businesses, and buy and sell whenever you want. You can even invest in a REIT exchange-traded fund – a basket of Real Estate Investment Trusts (REITs) that trade on the stock exchange. It allows you to invest in a range of real estate properties – from malls to residential apartment buildings to offices – without forking over big bucks for a down payment or holding costs.
Cons of buying stock
More volatility
One day, your $50 stock may be riding high at $75/share or plummet to $10/share. Prepare for a rollercoaster ride.
“Stocks come with the highest expected returns because they also come with the most risk,” says Engen. “Any individual company can lose money and even go out of business (and they routinely do), so picking individual stocks is inherently risky. It’s not easy to navigate the investment landscape and find a strategy that works for you at a reasonable cost.”
Market volatility is normal, so expect multiple mood swings from “Mr. Market” on any given day. However, you can protect yourself against market volatility by building a balanced, diversified portfolio of low-cost stock and bond index funds, and then buy and hold for the long-term.
“Many investors think short-term,” says Hallam. “But a 25-year-old has roughly a 55-year time duration to invest. People need to consider that their investment durations represent their lifetimes. And over every rolling historical 30-year period, global stocks have earned returns of at least 7.5% per year.”
Potential for panic-selling
If the real estate market dips, you probably won’t stick a “For Sale” sign on your front lawn. But living through Mr. Market’s many mood-swings can trigger intense emotions – even leading panic-stricken investors to sell off their portfolios. “Panic-selling” is one of the worst mistakes you can make as an investor, as those who panic-sell often end up buying high and selling low. If you’re prone to panic, put your investing on autopilot.
“Successful investors add money to the markets through thick and thin,” says Hallam. “They don’t speculate. They try not to think about market highs and lows. They try not to think about the economy. Fidelity did a report to suggest that the best investors were those who forgot they had money with Fidelity….or they were dead and the accounts were left alone. If people can, they should keep adding money every month regardless of the ‘noise.’”
Tips from the experts
Diversify, diversify, diversify
Whatever you do, don’t put all your eggs into one basket. Relying on the value of your home to solely fund your retirement is a risky strategy. Same with sinking your life savings into a single stock. It’s really not advisable.
The safest strategy is to diversify your investments. It could mean buying a house but also investing a portion of your income. For investing, it means building a risk-appropriate, diversified investment portfolio of low-cost stock and bond index funds, as well as allocate some funds in a high-interest savings account for emergencies and/or in GICs (the safest type of investment in Canada). Just like anything in life, it’s about achieving balance.
Set goals
“Tackle 2-3 financial priorities rather than trying to do everything,” says Engen. “There’s time to catch-up on RESP contributions and retirement savings if you’re really feeling the crunch of childcare expenses and car payments.”
Once you’ve done a bit of soul-searching about your priorities, set a schedule to save for one or two goals – and stick to it.
“If people put off investing to save for a home down payment, that’s not such a bad thing – as long as they don’t mess around,” says Hallam. “Make a concentrated effort to build the down payment within a pre-determined time period. Set an achievable, time-oriented goal and then relentlessly pursue it.”
Automate your savings
Whether your goal is to buy property or retire by a certain age, put your savings on autopilot.
“Treat your savings like a bill payment and contribute small amounts automatically every paycheque,” says Engen. “It adds up over time, and once your budget opens up a bit you can add another financial priority to the mix. You don’t have to tackle everything at once.”
Avoid being “house poor”
To achieve homeownership, some people have really stretched their budgets to the max: a recent poll found that nearly 25% of Canadians identify as “house poor,” meaning they spend 30% or more of their income on homeownership. Yikes!
“People shouldn’t buy ‘too much house,’” says Hallam. “In other words, they shouldn’t extend themselves when buying a home. People who live in bigger, more expensive homes are not happier than people who live in modest homes. And people with bigger debts are less happy. My advice is to keep things simple. Own fewer ‘things’ because ‘things’ don’t enhance life satisfaction. And by living simply, it will allow you to allocate more money towards paying off a mortgage (or building a down payment faster) and/or investing more money over time.”
The bottom line
There’s no one-size-fits-all answer to whether you should buy real estate or stocks. The answer highly depends on your personal circumstances and what you’re hoping to accomplish with your investment. Before choosing one route over the other, sit down and consider your current financial situation, your risk tolerance, set your goals, and then see how you might be able to diversify your investments instead of putting all your eggs in one basket.
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