Two of the scari­est words in per­sonal fi­nance to­day are ‘in­vest­ment prop­erty’

The Globe and Mail (Atlantic Edition) - - GLOBE INVESTOR - ROB CARRICK

Through 10 of the most con­fus­ing years ever for man­ag­ing your money, hous­ing has de­liv­ered.

So it’s no sur­prise that I’m hear­ing more and more from peo­ple think­ing about buy­ing an in­vest­ment prop­erty. Never mind whether this in­creased in­ter­est in in­vest­ing in houses and con­dos is a sign of a bub­ble or, at least, a sur­feit of en­thu­si­asm about real es­tate. Let’s look at the ques­tion on a pure fi­nan­cial-plan­ning ba­sis.

A reader re­cently asked whether buy­ing an in­vest­ment prop­erty with a friend made fi­nan­cial sense. “Most of my as­sets are in my house,” this per­son wrote. In that case, no. The in­vest­ment prop­erty does not make fi­nan­cial-plan­ning sense.

This view has noth­ing to do with the risks of do­ing a fi­nan­cial deal with a friend, or the mer­its of own­ing a par­tic­u­lar prop­erty as an in­vest­ment. The pur­chase could work out if the prop­erty is well lo­cated and in solid shape, good ten­ants can be found who will pay a com­pet­i­tive rent and costs such as prop­erty taxes and in­surance are man­age­able. The big­ger is­sue is how much of this per­son’s wealth would be tied up in res­i­den­tial real es­tate.

A house al­ready rep­re­sents most of this per­son’s as­sets, which is quite nor­mal in Canada to­day. Many peo­ple bought houses years or decades ago and have ben­e­fited from steady price in­creases. You can cer­tainly read this suc­cess in the hous­ing mar­ket is as an en­dorse­ment of the ben­e­fits of own­ing prop­erty. An­other re­ac­tion is to di­ver­sify your wealth so it’s not all tied to hous­ing.

Hous­ing prices have held up pretty well in many cities, de­spite a re­cent uptick in in­ter­est rates and gen­er­ally de­clin­ing af­ford­abil­ity. But even­tu­ally, house prices are go­ing to ei­ther fall or stag­nate. It could be higher in­ter­est rates that brings this change, or it could be a weaker econ­omy that causes un­em­ploy­ment to jump. The di­ver­si­fied in­vestor can weather a set­back for hous­ing by hold­ing dif­fer­ent as­sets – stocks, bonds, cash, term de­posits and so on. Peo­ple who own a home as a prin­ci­pal res­i­dence and an­other prop­erty as an in­vest­ment would have to face that stress­ful sit­u­a­tion where all their in­vest­ments are tank­ing at the same time.

A sign of a healthy bal­ance sheet is a house and a well-fed in­vest­ment port­fo­lio, not two houses and no in­vest­ments.

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