Investing in Real Estate vs Investment Portfolio

Many investors are faced with the question- should I invest in real estate or opt to create or add to an investment portfolio instead? By real estate, I mean land and buildings/property that can be rented out for income- I am not referring to just land or your primary home.  By investment portfolio, I mean a portfolio of financial assets such as stocks, bonds and alternative assets like real estate investment trusts, commodities like gold, silver, etc, art, derivatives, mortgage-backed securities, etc.

The decision is not purely a financial one, and so I will touch on both the financial and non-financial aspects of the decision. I also recognize that this article pins one type of investing against the other- in reality, an investor with adequate resources, including expertise, may choose to pursue both. 

Naturally, investors should compare returns and risks. That is dividend income & bond income vs rental income and real estate capital appreciation vs financial portfolio capital appreciation. 

Capital Appreciation/fluctuation

• Real estate- Usually holding physical real estate assumes a long-time horizon to gain the full benefit of potential capital appreciation – while we do not see it, the property value changes daily- we only see the value change when we do a valuation (or maybe see a close comparable on the market)- however, a valuation report comes at a high nominal cost. The rate of appreciation is usually heavily dependent on the dynamics of the property itself. Like stocks, real estate can depreciate as well but the chance of suffering a loss is mitigated by a long-term horizon. Some factors we should consider:  In normal circumstances, over the long-term, real estate returns between 4-8% per year (inclusive of rental income). In my personal experience, I’ve seen 5% in gross rental income annually and 3% in capital appreciation- but less expenses, the return is closer to 5-6% per annum. Real estate investing comes with non-financial costs and benefits. Benefit- peace of mind and pride of owning your own property/rental property, income, capital appreciation. Costs- managing the property, repairs, and maintenance, insurance. vacancy, real estate costs, selling costs, etc. 

  • Is Trinidad & Tobago going to be an attractive destination over your holding period? This depends on factors like crime levels, immigration trends, population growth, the expat market, and how the major industries are expected to perform- oil and gas, manufacturing, and tourism. T&T has an overreliance on Oil and Gas so this will have an oversized impact. 

  • How would your property compare to the current and future housing stock? High levels of crime may mean your gated community becomes more attractive vs. non-gated communities. How is the level of crime now and in the future in your neighborhood? Is your neighbourhood a desirable destination because of amenities like schools, grocery stores, gyms, etc. and are new developments making your neighbourhood more or less attractive comparatively? 

  • What is the housing stock look like today and will in the future? Is land space in TT, abundant or limited? 

  • Can you sell the property for TTD or USD? TTD currency has its own holding risk. 

  • Real estate is a concentrated investment- that is not diversified- geographic crises/events like earthquakes hurricanes, etc. can dramatically affect your values. 

• Financial investment portfolio- Like real estate investing, usually holding over the long-term maximizing your potential for capital appreciation. We do see the changes in the value of your investment portfolio daily because it is marked to market at no cost to the owner. The investment portfolio is made up of stocks, bonds and alternative assets like real estate investment trusts, commodities like gold, etc. Some factors we should consider:

  • Your risk tolerance determines your asset allocation and, hence, your projected returns- the typical moderate portfolio grows between 6-8% per year over the long term (including capital appreciation). Dividend income is usually between 2-3% (for local stocks, foreign stocks usually offer 1 to 2% on average but make up for that lower yield in higher capital appreciation) and capital appreciation is 4% to 5% per year. 

  • The level of risk you are taking depends on the portfolio in hand- investment portfolios tend to be diversified and, so may carry less risk than real estate (although portfolio risk more visible).  It is also a different type of risk. 

  • Currency mix- having some USD exposure is ideal given the state of the TTD. There are many TTD stocks at reasonable prices and high dividend yields at the moment, which gives a decent entry point. USD/hard currency portfolios tend to carry less corporate governance risk since investor protection laws are stronger in developed markets. 

  • Stocks accumulate value as profit is reinvested into the business and it pays dividends. Dividends are not mandatory so while dividends are likely to continue, the business is not mandated to pay it (a factor to consider if you are dependent on the cash flows, bonds may be a better instrument if you need cash flow).

  • Stocks can decline in value as well, so diversification is ideal. Whether an individual stock goes up or down depends on a lot of factors like quality of management, what phase the company cycle is in, what phase the market is in, company moats, etc. 

  • Financial investment portfolios tend to be hands-off, although you can choose to actively manage the portfolio yourself. 

  • Best results usually stem from dollar cost averaging (adding to your portfolio over time no matter the market conditions) and having a long-term time horizon.  

Whether you choose to invest in real estate or a financial asset investment portfolio, is up to your circumstances and whether the real estate is strategic for your life goals. Some exposure to both asset classes is good, but there is a time and place for each in your portfolio. Real estate investing gives you high financial leverage- low down payment with mortgage payments over time while financial portfolio investing cannot match the level of leverage given by mortgage providers. Real estate investing carries more physical work than owning a financial investment portfolio. On a long-term historical basis, financial portfolios may return the same or more than real estate investing- portfolios with more equities tend to outperform real estate. Experts in real estate may be able to beat the returns of a financial portfolio by strategically choosing high-growth segments of the market (e.g. GTA, Canada 10 years ago). Lastly, we should emphasize the risk and comfort level of the investor when choosing between the two. There is no investment worth losing sleep over.