Diversification is Key.
Now, I'm not a real estate agent, but I think these are some key points to consider.
I would be a poor financial planner indeed if I suggested a client invest 100% of their net worth in one mutual fund that invested in a tiny portion of the world economy in one particular industry. I always ensure my client have an appropriate exposure to global markets, different industries and the right balance between stocks and fixed-income investments like bonds or more simply: diversification.
But if you drain every cent of your savings (even your RRSP!) to make a downpayment on a home, you end up with all your money in the same place. All your previous savings, perhaps even ones earmarked for your retirement, are concentrated in one particular unit that’s one particular type of home in one particular neighbourhood in one particular city in one particular region in one particular country. This is the all your eggs in one basket scenario. Heck, this is one big egg in one small basket.
What happens if there is a major problem that develops in your strata? Or what if a plot of land that was previously unoccupied gets sold off and rezoned for high-rises, blocking your mountain views? What if your foundation cracks? What if a buried oil tank is discovered and requires costly remediation? What if a key industry slowly abandons your region, leaving economic and employment prospects bleak? What if inflation runs out of control and the central bank increases interest rates to the point that you can’t afford your mortgage payment?
A good portfolio of mutual funds are diversified across different types of industries, different global regions, and different types of assets (bonds versus stocks etc). It’s hard for an individual investor to have the same level of diversification in an individually-held real estate investment.
Check back next week for the next installment in this real estate series: Fee Disclosures. You can also drop me a line to hear more.