Average Home Insurance Premium Toronto

Is buying a house a good investment?

Intended audience

Persons wishing to purchase a home for personal use or as an investment. So good to look at conventional wisdom's statement that buying a house is one of the best investments anyone can make.

Summary Points Takeaway

• Why a house is a good investment: (1) Forced Savings Plan (2) Leverage (3) Inflation Resistant (4) Tax Free Capital Gain (5) Control over Asset.
• Points against a house as an investment: (1) lack of diversification (2) maintenance costs (3) Historical lower return than equities (4) available to take advantage of other opportunities (5) limited in scope.
• Additional points to consider in planning of buying property for personal use: (1) does not cash flow (2) No tax shelter interest expense (3) Can get personal pleasure out of investments.

Analysis

Conventional wisdom that buying a house is one of the smartest and best investments an individual can do. This article is aimed at challenging this conclusion to see if this statement puts some truth in it.

Why a house is a good investment?

Forced savings

Most individuals claim that the purchase of their private home was the best investment they ever made, which is true in the most cases because it is the only investment they ever made. The public struggle to save for retirement, so buying a house help this problem because it forces individuals to pay off current mortgage (or lose the house in a foreclosure to the bank) and thus allows storage of equity for the owners. This built up equity (Ie market value of home minus outstanding mortgage) can be borrowed against during their retirement, or they can downgrade to a cheaper house to give some pension funds to the owner. If individuals take a disciplined approach to saving, so the advantage of being forced to save to pay for a house reduces

Leverage

Typical real estate purchases require only a 5% deposit, while the remaining amount can be borrowed through bank debt. Find alternative investments away from Property title may obtain such an important lever that can improve ROI.

Suppose you purchased a home for $ 200k, which you made a 5% deposit down ($ 10k). Over the next few years the house appreciates in value and you sell it for $ 220K (10% higher than the level you bought it). Although the return of the house is only 10%, the return to investors based on the invested funds sunk into the home ($ 10k) is 200% ($ 20k earned over $ 10k investment) – the power of leverage. On the negative side means more debt higher fixed monthly mortgage payments and thus, greater risk of being unable to make the monthly mortgage payments. As long as liquidity is a concern, and mortgage payments can be met – investments should be used to optimize the return to the investor. Could you imagine going into a bank and ask for $ 100k to invest in shares, while only put 5% down – probably never happen, it's a big advantage of real estate ownership.

Inflation Resistant

Real estate has its value during inflationary periods, and thus acts as a hedge against the investors other assets not protect against inflation (ex. currency). The asset will continue to keep its purchasing power (store of value), which are difficult to get out of investing in precious metals. The reason real estate holding its value is the same number of houses that the increased money supply of dollars chasing, and thus, it will take more U.S. dollars to buy houses as the supply of houses to stay stagnant while demand increases (due to the increase in the number of dollars in everyone's hands). This may become critical given the current economic times and numerous expansions of the money supply across many nations that want to affect the wake of higher inflation.

Capital gains Tax-Free

In Canada All home owner equipment with a capital gains exemption for amounts earned in excess of cost of their principal residence. Only one piece of real estate may be required as the principal residence per individual. For example, if you owned a home and a cottage, only one of the houses at the handover could take advantage of the principal residence requirement exemption. No other asset class has such advantageous tax attributes. Unfortunately, this is a one-time event, and thus, those who have numerous real estate can only use it for a property.

Provides opportunity for control of the Asset

Real estate is typically an investment a person has control over (assuming you are a majority owner – typically the case) through the owner has the ability to increase the value of the assets can not be the case in most other investment opportunities. When buying real estate, may owners make capital improvements to the home (ex Finished basement, new porch, etc.), which will increase the value of the property (capital appreciation) compared purchasing stocks or mutual funds as assets in which the owner can not take steps to increase the value of these assets (unless they are a significant owner, more than 20% – Which typically is unlikely). The ability to manage an asset adds value to the owner through what is known as a control premium as a real estate asset can be more valuable in the hands of some individuals over others.

Why a house is a bad investment

Lack of Diversification

Average individual thinks the stock market is very risky while investing in real estate is safer. Buying shares gives the owner Conveniently hedge their risk among different companies in many different industries, countries, etc. purchase of real property does not allow it to diversify risk away as easy, unless an investor plans to hold a variety of pieces of different types of properties (eg residential, commercial, resorts, etc) across different markets (North America, Europe, etc.) – which is probably very unlikely for the average investor. Purchases of property prevents the spread of risk because it depends on economic, migration, and regulatory trends in the local area.

For example, assume you bought a home in Oshawa, Ontario – is a city heavily dependent on large manufacturing firms feature in General Motors (GM). Should GM cut back on production or relocate their facilities housing prices will fall sharply, as it is the largest employer in the area, so the demand from individuals will fall as unemployment rises and real incomes fall. With a slowdown in demand and supply stays stagnate (which you typically can not "un-build" a house when it was built) the price will have to change direction in order to bring demand and supply.

Real estate does not allow investors to diversify away the specific risks in the local area compared to buying shares, allowing investors to spread risk between investment performs differently at different points along the economic cycle. Most individuals purchase of real estate have all their eggs in one basket.

Maintenance Costs

Transaction and maintenance costs are significantly higher for property investment than equities, mutual funds, etc. The purchase of shares typically costs broker commissions ($ 20 per transaction if you use an online discount broker), whereas when buying a home is typically 2% commission on the transaction value, which is significantly higher than by buying shares.

When you buy shares for no additional cash is required from the investor as opposed to real property that requires constant annual costs continue to increase investors' cash committed against property such as property taxes, insurance, utilities, maintenance and repair of the asset, etc. These are costs, real estate or home buyers do not factor in their expected returns, but plays an important role in payment of property taxes (Etc.) do not contribute to the value of the property for possible sale in the hope of capital appreciation.

Historical Lower Returns Compared Equities

During a 20-year period throughout history, have no other asset class outperformed equities, including real estate. This is seen from the active contra asset without regard to leverage and how it can increase the yield (as discussed earlier). While it is true that in the long run real estate prices go up in value, it is typically due to inflation incurred. Recent increases in house prices seen over the past 10 to 15 years has been due to demographic changes, especially the baby boomer generation (which represents the largest segment of the population in North America) goes through life stages at the same time (same goes for starting a family and buy a house and real estate investment properties). The result was a massive surge in demand without a corresponding increase in supply construction requires delivery, leading rising real estate prices.

Will this high demand continue? This is where the argument lies. Will probably be marked softness in total real estate demand as baby boomers already have their homes and they are probably either stay put, move to nursing homes or downgrade to a smaller place to get some retirement income. Immigration will continue into North America that will prop up demand, but probably not to the extent that meet the entire demand left of the baby boomer generation and therefore the future appreciation in the properties is expected to level off.

Can not Take opportunities

When buying a home or property requires the individual to commit a significant portion of their net equity in the property (in many cases the whole). Have all your net worth in real property is a risky strategy, as you will be seriously affected by movements in property prices compared to having your money tied up in multiple asset classes, representing less vulnerable to fluctuations in an asset class. Like the debate had "Diversification" section of this article.

With most of the investors net worth tied up in real estate, there is no cash to take advantage of other opportunities that come and so are large opportunity costs involved in venturing into real estate. This should be considered before purchasing an expensive personal home or make an investment in real estate.

Limited Scope

Real estate is a local good, unlike gold, for example – which can be bought and sold throughout the year for the same price. An individual wishing to purchase a personal home or make an investment in real estate does not have access to all available properties for which there are physical limitations to contend with. It comes down to wanting to live, where you grew up or currently work or do not want to buy a rental property far from your home to reduce logistical problems. For example, if you live in Toronto, Ontario and looking to make an investment in a rental property, you're likely to consider properties in Paris, France, although they can be better than the surrounding Toronto because of linguistic and logistical problems. Shares (and similar) is globally traded and available, and so users can take advantage of opportunities worldwide, and thus their scope is not limited to the local area of their current surroundings as real estate is.

Additional points to consider if you buy a home for personal use.

Provides no Cash Flow

An asset typically gives you cash flow, which makes cash in your pocket. When buying a home, cash only runs out (property, repairs, etc.) and some would argue that if it appreciates in value, then it is an advantage. In this case it is only an asset when converted to cash, and if so, where will you live? Likely end up buying a new house, which has also gone up in value to your house. This makes it difficult to realize the value of your personal home appreciation, which acts more like a liability than an asset because it takes money out of his pocket instead of putting some in there.

Tax deductibility of interest payments

Interest expenses paid as a result of bank loans to finance investment property is deductible in income because the investor is in the process of income and tax law allows deduction of any costs associated with the pursuit of income. This is not the case of a mortgage taken out to buy a house for personal use by individuals not In pursuit of income, and thus, interest is paid with after tax dollars, excluding tax shelter provided. If these funds were borrowed to invest in shares or investment funds, interest would be deductible, again because it would count against the theme of pursuing income.

Can Get personal joy out of it

Contrary to equities and alternative investments, investors can not personally use or benefit from it in relation to buying a home, an individual can live in and enjoy during the investment process. An investor who buys shares in General Motors (GM) can not even borrow and test drive cars when they want simply because they are a part owner. This is a qualitative advantage that is difficult to quantify, but should be considered.

Where to go from here?

The main reason to buy a house is to have a place to live and enjoy their lives, do not think of it as an investment. Buying a home isn'ta bad decision, it is investor perception that may be tainted because it is important to realize that there are many arguments against a home as an investment that must be considered. Do not buy property with the idea that a citizen can not lose and there is no better investment option than buying a home, etc. Beware conventional wisdom that states there is no better investment than buying a house.

THANKS,

SIMON GIANNAKIS

About the Author

Simon Giannakis is the founder and creator of WWW.THATSTOCKGUY.NET. He currently is a Senior Accountant within the Assurance and Advisory group at Deloitte & Touche LLP in Toronto, Ontario. He has a BBA degree from Wilfrid Laurier University and is currently pursuing both CA and CFA designations. Simon can be contacted through thatstockguy.net@gmail.com. IF YOU WOULD LIKE TO CONTRIBUTE AN ARTICLE TO THATSTOCKGUY.NET, PLEASE CONTACT US.

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