Residential real estate: Real assets, real value
Real estate is a tangible investment that delivers real, uncorrelated value.
We’ve previously outlined the differences between the 3 categories of real estate types - residential, commercial and industrial.
In this article, we will take a look at residential real estate as an investment.
A real alternative
When you think about investing, you probably typically think of publicly-traded securities - buying stocks or bonds on one of the public exchanges. But there is a world of investment beyond just stocks and bonds - so-called alternatives. This is a very broad category that includes investment in hedge funds, private equity, and infrastructure - but one of the most tangible and approachable alternatives is real estate.
Many Canadians own their home, and therefore already have exposure to real estate. It’s an excellent addition to any portfolio. This is because it provides a source of return that is uncorrelated to the direction of the public markets - tenants must pay rent every month irrespective of how the TSX is doing. Therefore, it helps you truly diversify.
Canadian residential real estate is famous for being expensive. While the reasons behind its persistent strength are the subject of heated debate, in recent years, a consensus has been reached:
Canadian real estate has strong fundamentals because there is a mismatch between demand and supply.
Canada’s population continues to grow - and all those people need places to live. This is true both in so-called hot markets in Toronto and Vancouver and in many smaller markets across the country.
These strong fundamentals are the reason behind soaring asset values - even as the stock market struggles to keep up. A single family home in the City of Toronto, in 2020, cost an average of $929,699. In 2023, even with recent decreases in price, the average price for a similar single family home stands at $1,294,100 – a 39% increase in about 3 years. This is a large return when, compared to say, the S&P/ TSX Composite index, which over the same time period returned on average 12.86%.
It’s not just the big cities like Toronto and Vancouver. In fact, research shows the average forecasted house price across all provinces in Canada, with few exceptions, will rise by the end of Q4 2023 by an estimated 4.5%.
The important thing about these forecasts is that they exist independently of the swings of the stock market. Even rising interest rates didn’t slow Canadian real estate down. With strong cash flows, strong capital appreciation and strong fundamentals, Canadian real estate is a true diversifier - a safe bet for the long term.
At Parvis, we bring investors access to institutional quality real estate investments that previously they weren’t able to access. Start investing with Parvis today so you can grow your wealth through quality real estate projects via our technologically advanced and easy to use investment platform.
How can I invest in residential real estate?
If you own your home, you probably already have exposure to real estate in your portfolio of assets - and you’re able to enjoy capital appreciation tax-free, due to special tax treatment for principal residences. But real estate purchased as an investment asset, as opposed to a home, acts differently. When you own real estate as an asset, you enjoy capital appreciation - but you also enjoy substantial cash flow, as units are rented out every month.
When it comes to residential real estate, there are as many different investment options as there are forms of housing tenure:
- Single-family homes - An increasingly in-demand form of housing tenure in Canada; commands substantial potential for capital appreciation, but can be inaccessible to an individual investor
- Individual condominiums - A more accessible form of outright ownership than single-family homes, many condominiums, instead of being owner-occupied, are investor-owned and rented out on the secondary rental market
- Multi-family rental - These traditional ‘apartment buildings’ are sometimes owned by an individual. This is particularly true of older, lowrise apartment buildings, which were purchased when real estate was much less expensive - and therefore accessible to an individual investor, or to a family office
There are also forms of residential real estate investment targeted at specific markets, such as student housing - which is multi-family purpose-built rental aimed at the student market, enjoying the advantage of frequent tenant turnover - and therefore frequent mark-to-market.
For investors who wish to look beyond residential real estate, commercial and industrial real estate investment also offers significant opportunities.
But for many investors, outright ownership of real estate can be inaccessible - or can cause one’s desired portfolio allocation to fall out of balance. There are ways to invest in real estate, and enjoy capital appreciation, without purchasing an entire property:
- The purchase of a REIT (real estate investment trust) where you can see a monthly distribution and stock appreciation
- Investment in real estate off the public markets - either in a private REIT or other real estate investment vehicle
- Purchase of an ETF that contains REITs or other real estate assets
- Investing in a multi-family development on Parvis’ platform
What is the best type of real estate investment?
Like with all investment, there is no ‘best’ type of real estate - there are real estate investment opportunities that fit with different investment objectives and horizons.
In general, portfolio managers consider real estate to be a ‘diversifier’. But investors looking for strong capital appreciation may want to consider single-family homes, which are a hot commodity in major cities - while investors who prefer strong cash-flow may prefer to invest in purpose-built rentals.
Investors should also consider whether they want to invest in an individual property, which they believe will deliver the risk-adjusted return they are looking for - or if they prefer a pooled approach, which comes with instant diversification.
On Parvis’ platform, we offer both private funds and individual development investment options. To explore residential real estate investment opportunities, sign up to Parvis for free today.