Real estate is often viewed as a safe investment option for investors. With prices generally rising over the users, it can sometimes appear to be a no-brainer for people to invest in real estate.
That said, as someone who lost over $30,000 this year on a home thanks to a dreadful Alberta market, I cringe when it’s suggested that real estate is a sure thing.
Take the Greater Vancouver market as an example. The once-scorching market has made it easy to find homes in the suburbs priced at over $1,000,000 and there are concerns that vales may have peaked.
In September, Royal LePage reported for the first time in more than five years that the property values in the area had dropped. During July, August, and September, home prices had fallen by 5.2%.
Toronto, meanwhile, has seen its prices rise. The difference in markets can have a big impact on whether someone is able to record gains on their property or losses. It’s no different from investing in an industry such as oil and gas, where challenging conditions could make it a risky sector of the market in which to invest.
When you buy a home in a city with rising property values, you have to consider whether values have become too rich; it’s similar to buying shares that are near their 52-week highs.
Why stocks are a better option
In addition to prices being very high, there are a couple of very important reasons as to why investors may be better off investing in stocks instead.
The first is that it prevents you from tying up your savings into one investment. If you invest tens of thousands of dollars into a down payment for a home, that’s money that’s not very liquid, so if a family emergency or a better investment comes up, you wouldn’t be able to easily pull those funds out.
The second issue is a lack of diversification. With stocks, you could invest in a variety of different options to put your money into. With the purchase of a home, however, you’re effectively putting a significant amount of money into just one type of investment — and that’s very risky given the headwinds that the real estate markets are facing today.
A safe option
RioCan Real Estate Investment Trust (TSX:REI.UN) can be a much more appealing investment for prospective home buyers. RioCan has many properties under its belt across Canada and it allows investors to take advantage of investing in a series of real estate markets without putting down a large investment.
As real estate properties rise in value, RioCan will be able to benefit through rising asset values on its balance sheet. And that could help its valuation improve as well.
Not only that, but investors of RioCan will also benefit from its strong dividend. With a yield of 5.4% per year, RioCan shareholders can earn some solid dividend income even if the markets aren’t doing so well. Year to date, the stock has climbed by more than 10%.
Overall, the real estate investment trust gives investors a great way to invest in real estate and diversify their investment in the process — and you could also decide to invest some of that money into other growth stocks.
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Fool contributor David Jagielski has no position in any of the stocks mentioned.
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