As a curious investment adviser, I鈥檓听always听looking for assets听that will provide long-term rates of return that get my clients from A to B without exposing them to excessive risk. That doesn鈥檛 mean we chase the asset class that did the best last year. In fact, quite the contrary. But when comparing the听relative听performance of your investments, making sure you do so on a level playing field is crucial to getting the听real听information you may be looking for.
I听frequently hear about how听owning direct听real estate, especially in Metro Vancouver, is a "no brainer" investment, for even the least-sophisticated investor. But despite an incredible environment for real estate over the last 10 years, it has听actually听underperformed听highly liquid U.S.听stocks. And, when you consider听the true costs of ownership, onerous tenant needs and potential for illiquidity, you may think twice about an over-concentration in this class.
One difference between stocks and real estate is that stock听prices are readily observable,听and as a result听we听are often听tempted into being more transactional.
But what if we treated听our听public securities as longer-term assets听鈥� specifically,听how might the performance of owning Metro Vancouver听real听estate compare听with听that of the S&P 500 over the last 10 years?
Before we get into this, let me be clear on a few points:
1. I am a believer in diversifying your investible asset base across a number of asset classes, including real estate. So far, it鈥檚听one of the few听asset classes听I have found where tenants spend their own money to improve your asset and then agree to rent it back from you (wow!)
2. Complexity makes comparing returns tricky. Assumptions听from credible sources听are needed听to reach a fair comparison.
3. Past performance does not guarantee future returns.听It has been an exceptional time for both U.S.听stocks and Metro 麻豆传媒映画real estate, and a degree of caution is warranted.听
We have听used听the S&P 500 Total Return Index (in U.S.听dollars) as a proxy for U.S.听stocks.听鈥淭otal return鈥� means the index assumes your dividends are reinvested back into the companies you invested in. This index has returned an impressive 15.9 per cent compounded annually听from听March of 2009听to March of 2019.听 That鈥檚 like turning $1 million into $4.4 million over 10 years!
In comparison,听the price of a typical Metro 麻豆传媒映画apartment has grown from $326,200 to $656,900听over 10 years.听Accounting for听average rental incomes听of $1,348 per month,听average property taxes of $1,500 per year, average maintenance fees of $340 per month, compound annual returns would have been 9.8 per cent over the same period. Similarly, the price of a single-family property in Metro 麻豆传媒映画has increased from $692,400 to $1,441,000. Accounting for average rental incomes of $3,370 per month, average property taxes of $3,241 per year and average maintenance fees of $850 per month, compound annual returns would have been 10.5 per cent.听
These returns also assume an investor reinvested听their pre-tax free cash flow听from excess rent听at a healthy 10 per cent compounded annually.
For simplicity's sake, I ignored transaction costs, investment advisory fees, property management fees, property sales commissions and personal or corporate taxes.听 Note that these returns are historical and future returns, of course, cannot be guaranteed.
Now I can鈥檛 think of a better 10-year period for U.S. stocks,听so I am not surprised by these results.听But听I also recognize that March 2009 just happened to be the end of the financial crisis and public markets were depressed 鈥� perhaps overly so.
To be fair, I also calculated the results as of January 2005 before the U.S. market corrected (just over 14 years ago), which is as far back as far as the CREA real estate data would allow.听In that instance, real estate did outperform the S&P 500,听but听only听marginally.
It鈥檚 been a remarkable time for both of these asset classes and I would caution you if you are expecting these returns to continue. However, I am confident you听are now听armed with the听facts the next time your听sister-in-law is boasting about how much听she听made in Metro听Vancouver听real estate.
Jeff Boomer is an听investment听adviser with听RBC Dominion Securities Inc. (a听member听of the听Canadian Investor Protection Fund). The information in this article is not investment advice and should only be used in conjunction with a discussion with a听qualified investment听adviser. This will ensure that your own circumstances have been properly considered and that any action that is taken is upon the latest available information.
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