As I logged into my online investment account today, I coudln’t help but feel that uncomfortableness in the pit of my stomach.
My entire portfolio is down over the last six weeks, and it hurts to see it up close and personal.
While I’m disappointed, I’m not worried. I’ve owned some of these stocks for nearly a decade, and my investment horizon is long term.
What is your real estate investment horizon?
In the spring of 2001, I purchased 200 shares of Rothmans for $22.55 per share. At the time, I liked the fact that the stock paid about a 5.5% annual dividend, and that it was widely considered a great “growth stock.”
I didn’t really look at the short term fluctuations of the stock (well I did, I just didn’t concern myself with it), but I collected those 5.5% dividends and watched the stock grow. There were some huge bumps along the way; the stock lost almost 50% of it’s value between 2003 and 2004, but as I held my ground through those rough times, I continued collecting the dividends.
The stock gained back every penny of its 2004 loss, and eventually the stock split. I am now the proud owner of 400 shares of Rothmans which are valued at about $25/share (remember the split!), and I have been collecting a 5.5% dividend every year for seven years.
The stock is down a whopping 11% in the past three weeks, but I remain calm.
What’s worse, is my shares of TD Bank are down 18% since June, but again, I remain calm.
The reason? My investment horizon is long-term, and I consider these to be “short term fluctuations.”
I know that everybody has their own strategies, thoughts, and opinions, and if you are reading this right now thinking, “This guy is so wrong it’s not funny,” then I actually applaud your initiative to take a stance on the issue!
But when it comes to the real estate market, my investment horizon is the exact same: long term.
My friend Damir is ready to buy his first condominium, and he tells me that people at work are lining up to give him their opinion. People say things like, “Wait for the market to crash, buddy!”
First of all, I don’t see a market “crash,” and neither do most experts. We may see a levelling off of growth (consider how high the growth has been in the past seven years), or even stagnant growth at some point.
But regardless, Damir’s investment horizon is long term. He is looking to buy this condominium, and live there for the better part of a decade.
Consider that the unit we are looking at purchasing is currently tenanted. The tenant pays $1700/month, and the unit is priced at $350,000. I’ll save you the math, but Damir can carry this unit by paying roughly $450/month out of his own pocket. He is not ready to move yet, but he loves this unit. He has the luxury of buying the unit now and allowing the tenant to stay until next April when he wants to move. In the meantime, he’ll be paying money into his mortgage rather than rent, and he’ll be getting money back in the form of principal on his mortgage.
Damir asked me today, “What if this condo is worth $300,000 next year?”
I told him that is absolutely ridiculous, and prices are not going to drop at all, let alone 14% in an entire year. But he said, “Let’s just discuss for argument’s sake.”
So we weighed the pros and cons. If he had to move, that is, if he were forced to sell the condo because of a job relocation or perhaps money problems, then he would be down the $50,000. But since he has income from another property his family owns to pay the mortgage on this condo, and he has a very steady job, he need not worry. His plan is to be living in that condo for the next 8-10 years.
So ultimately, the fluctuations in the value of this condo over the next eight years don’t really affect him, do they?
Sure, you might feel that uncomfortableness in the pit of your stomach if you hear that prices have decreased, but real estate isn’t like shares of stock where there is an exact price (to the penny!) of your investment at all times.
Damir’s investment horizon is long-term, although depending on your definitions of short, medium, and long term, perhaps his is “medium.”
Let’s assume for a moment that a young couple has been buying, renovating, and flipping houses for the past eight years. These two young people work as a contractor and an interior designer, respectively, and they buy a property, renovate it over the course of a year, and then sell it. They have done this eight times in eight years, and made a ton of money.
This is a short-term investment horizon. This young couple is far more susceptible to the market fluctuations than my friend Damir would be, since they are speculating that the market will continue to rise 7-10% per year in order to cover all their soft costs associated with their property renovation.
By definition, a person looking to buy a condo and live in it for 2-3 years might also be investing in a short-term vehicle as well. The shorter the investment horizon, the larger the risk. Just look at day-traders on the TSX! If you’re looking to profit off a stock after a few hours, surely your speculation is much higher than if you had weeks, months, or years to hold the stock until the opportune time to sell!
The true long-term real estate play would be with an investment property or vacant land. When it comes to a principal residence, most people don’t live there for 20 years, although clearly a single-family dwelling might fit that bill. But on average, with condominiums and houses in Toronto, people move around every so often and on average most principal residences couldn’t be considered anything but short or medium-term investments.
The one luxury that most of us don’t have is time. Time, which of course is a function of money…or perhaps it’s the other way around.
But if you had “extra” or “ample” money to invest long-term, that is to say that if you had the time necessary to facilitate the long-term investment, then it might be hard to lose money on basically anything in the city of Toronto. What I mean by this, is that if you purchased any building, condo, house, piece of land, etc., and held it for 25 years, I’m positive there would come a time when you could sell that property for a profit—also taking into account inflation.
Vacant land is a terrific investment over the course of 25 years. Just think of how cheap the land was in Markham in 1983 and how many sub-divisions currently occupy what used to be “cheap land.”
It’s always easier to look back, but surely we can use this to look forward, can’t we?
I don’t have the money right now to invest in something where I know I can’t touch it for 25 years, but I personally believe that is the way to the riches we all dream of. Have you ever sat next to a successful businessman on a chairlift at a Vail ski resort and heard him tell his story, “I bought up all this cheap land back in ’64 when they were practically giving it away! Who knew this stuff would be worth a million an acre now?”
I wish that everybody would consider their investment horizon before any purchase they make. If you buy a new couch, you have to ask yourself, “Do I expect to still be using this $1100 couch in three years?” Or if you’re contemplating the purchase of new cookware or dinner plates, but you’re scheduled to be married in 12 months, you should know that any money you spend now is a waste considering you’re going to replace all that stuff with high-quality products chosen from your gift registry!
Real estate can’t be compared to dinner plates since you don’t upgrade your real estate and give your previous property to your little sister. But the idea behind the investment horizon rings true for both purchases, and obviously the larger the purchase, the more thought out it needs to be.
People ask me, “What is this condo going to be worth in a year.”
While I don’t know the answer, I’d like to respond with a question: “Well, how long are you planning on living here?”