This question looms for all investors, especially given the extended bull run we’ve seen in both the Canadian real estate and equity markets. There are pros and cons for investing in each sector. Which is best suited for you?

Larysa Troyanovska, Senior Wealth Advisor with Servus Wealth Strategies and Aviso Wealth, has experience to help guide you in answering that question.

“Whether you are considering one or the other, I would always recommend speaking with a respective professional in the field,” says Troyanovska.

“Your financial advisor can help assess both options with the bigger picture in mind — namely, your unique circumstances, which could be affected not only by financial factors but also your stage of life, family dynamics and other elements,” Troyanovska says. A financial advisor can help you compare the projected long-term impacts of the alternative choices on your overall financial well-being.

Similarly, a trusted realtor can be a reliable source of information concerning a prospective property purchase. There are many factors to consider, especially if it's a revenue property, such as location or the type of property.

“Ultimately, it all comes down to a person's goals,” says Troyanovska. “Having a clear understanding of your goals will help determine the best fit for your investments.”

For example, if you want to own a principal residence and have real estate as an investment, but have no desire to be hands-on with it, an investment portfolio that has real estate stocks or Real Estate Investment Trusts (REITs) could be an alternative.

So, who is each best suited for?

A young family coming into the real estate market now is likely to have very different considerations than someone nearing retirement who has been a homeowner for years. Just getting into the market is more of a challenge for younger investors as housing affordability has become a major issue in Canada.

“I cannot emphasize enough that determining your best investment choice — and regularly reassessing its ongoing suitability — ties into your overall financial plan,” says Troyanovska.

She narrows the comparison down to four major factors:

1. Minimum investment required. The minimum amount to enter an investment can vary. While markets can have very affordable minimums ($500 lump sum or as low as $25/month for most mutual funds*), purchasing real estate tends to have significantly higher minimums. Consider the down payment (at least 5% of purchase price for a principal residence and 20% for a revenue/vacation property), inspection costs, possibly appraisal fees, closing costs with a lawyer to finalize a deal and update the title, and more.

   “If your goal is to enter into the real estate market and buying a principal residence is the way to start, a Home Buyer's Plan may be a tax-efficient solution to help achieve this goal by accessing savings that are already available, such as an RRSP,” she says. “This is why speaking with a financial advisor is an important step.”

2. Liquidity (the ability to access funds quickly and easily). Market investments such as stocks* or ETFs or mutual funds tend to have high liquidity and can be sold within a matter of days with minimal to no cost. It is also possible to sell all or part of an investment portfolio.

   On the other hand, real estate is not as liquid. A property may take months to sell and could have a long closing period. During this time, property taxes, mortgage and other expenses still need to be paid. A person may feel the need to drop the price for a quick sale and the entire property is being sold, not a part of it.

3. Costs. Professionally actively managed portfolios often have ongoing maintenance and rebalancing fees which are known ahead of time. Transaction costs are usually low or zero. With real estate, a mortgage could be an ongoing cost and will fluctuate with interest rates. Additionally, with a rental property, it's prudent to budget for potential vacancy of one to two months per year. You may also choose to manage a property on your own or hire a property management firm.

4. Effective diversification. With a diversified portfolio, you can minimize the risks by investing in different asset classes, regions and sectors. This is especially important for newer investors who may not have experienced various parts of a business cycle and have not seen their long-term effects on investments (market or real estate).

   “Ultimately, getting the investment choices that end up driving your overall financial plan in the right direction is the key,” says Troyanovska.

What are the pros and cons of real estate?

Pros:

• Tangible
• You can choose between hands-on and hands-off management
• When you pay a professional management fee, it can be used as a taxable write-off against the rental income earned (consult a tax professional)
• You can refinance the accrued equity

Cons:

• Risk of physical damage
• Higher minimum to enter and with rentals you should budget for potential vacancy of one to two months per year

What are the pros and cons of market investments?

Pros:

• Mostly liquid, easy to buy and sell (which could be a detriment if you panic during volatile times and sell out of fear vs. sticking to a plan)
• With professionally managed portfolios, money is actively looked after full-time, can have automatic rebalancing and effective diversification. Depending on your circumstances, certain fees can be used as a taxable write-off against the investment income earned (consult a tax professional)
• Hands-off approach (unless you choose to manage a self-directed account)
• Low minimum required to enter

Cons:

• Intangible
• Like with real estate: if professionally managed, fees are still ongoing during short- to mid-term volatility

Is now a good time to invest in either? This really depends on your unique circumstances. Speak to your financial advisor to weigh the pros and cons of each option. There is always an opportunity to improve your overall investment portfolio. “Being able to evaluate the alternatives and make a well-informed decision is the key,” says Troyanovska.

Servus Wealth Strategies Ltd. is a subsidiary of Servus Credit Union Ltd. offering financial planning, life insurance and investments. Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated.

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities.