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.