Investment property or investment portfolio: 5 factors to consider
Author: Sound Choices
July 12, 2018
The content in the below article is meant for Canadian investors only.
In this series of articles, we discuss how investing in real estate over equities is not as black and white as many people would believe. Today’s article addresses investment properties – what are the factors to consider?
Factor #1: Diversification
| Having multiple properties in the same geographic area can lead to concentration risk. | With a diversified portfolio, you can minimize the risks by investing in different asset classes, regions and sectors. |
| If real estate values go down, it can have a negative effect across all your properties. |
Factor #2: Liquidity
| Not considered a liquid investment – may take months to sell – and once sold, could have a long closing period. | Generally highly liquid and can be sold within two or three days with minimal to no cost. |
| During this time, property taxes, mortgages and other expenses still need to be paid. | Able to sell part of the portfolio. |
| If you suddenly need to sell a property, this can be costly and you may need to reduce the price. | |
| Cannot sell a portion of a property. |
Factor #3: Minimum Investment Required
| Relatively high | Low |
Factor #4: Tax Efficiency of Income*
| Rental income taxed as income (fully taxable). | Distributions can include interest, dividend income, other income, capital gains and return of capital. |
| Dispositions can be taxed as income** or capital gains for non-principal residence | Dispostions can be taxed as income** or capital gains for non-principal residence |
Factor #5: Costs / Expenses
| Mortgage rates remain low, but if interest rates rise, that can have a significant impact on your monthly cash flow. | A fund’s Management Expense Ratio (MER) pays for the maintenance, rebalancing and ongoing advice received. |
| If the property becomes vacant or is damaged, still have to pay mortgage / other costs. | Costs are known and can be found on the fund’s website or fund facts. |
| May manage on your own or need a firm to manage your properties, given the time and effort required. | Transaction costs usually zero to low. |
| Can be unpredictable – management fees can cost 8%-12% of the rental income, which doesn’t include the ongoing maintenance of the home. | |
| Transaction costs approximately 4%-6%. |
The important thing to remember is that a properly balanced portfolio can help mitigate risk, can also increase in value over the long term, all while costing less to manage over investing in real estate alone.
Talk to your financial advisor today about which real estate investments make sense for your overall portfolio. And stay tuned for the next instalment in this series.
*Assumes a Canadian investor holding Canadian real estate/securities.
**If you are considered to be in the business of buying and selling property/securities, or recapture from claiming excess capital cost allowance.
The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
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