It's time to tamp down our eagerness to invest in real estate.
You own a house? Then you probably don't need much more exposure to real estate in your financial holdings than that. Think twice about putting money into syndicated mortgages, mortgage investment corporations (MICs) and real estate investment trusts (REITs) with exposure to residential as opposed to commercial real estate. The same applies to investment properties in the residential market.
With interest rates as low as they are, investors are desperately looking for yield beyond the bond market and GICs. MICs and syndicated mortgages offer this, as do REITs. But as so often happens when chasing yield, there can be unintended consequences with investments in real estate. One of the biggest risks is overweighting yourself in this sector.
Consider all your assets together – investments in stocks and bonds plus your house and anything else. Many will find that their house is far and away the dominant slice of the pie, which is to be expected after the dramatic price increases in some cities. This is great news for many people – a windfall unknown to previous generations.
But if the housing market falls hard, and it certainly could, then a heavy weighting in residential real estate might hurt you excessively. Your house would lose value, and the real estate investments you have in addition to your home could be negatively affected as well.
Remember how people with too much tech got hammered in 2000-01? Or how people with too much of their portfolios in oil and mining stocks got beat up a couple of years ago? You're vulnerable to the same kind of setback if you allow real estate to own your personal balance sheet.
What real estate-hungry investors may not realize is that they already have exposure to real estate beyond their homes if they hold diversified Canadian equity funds. The likes of RioCan, H&R and Canadian REIT are commonly found in these funds. You're getting just the right complement to your house with names such as these – commercial real estate-like offices, shopping centres and industrial locations.
Houses have been the uncontested champion of wealth creation for many people in the past several years. Enjoy your gain if you're in that group, but don't be greedy.
Rob Carrick