Rental Property vs. Investing in the Stock Market

By: Jonathan Gottesman, Wealth Advisor, Pearl Financial Group, iA Private Wealth

With so much change in the economy recently, rising interest rates, stock market volatility, increasing mortgage rates etc., how does one know where to invest their funds? There are many options, including purchasing a rental property and investing in the stock market. The question becomes, which makes the most sense as an investor? The breakdown below is composed of theoretical numbers and is not based off an actual listing.

Let’s break this down to further understand what is needed to purchase a rental property.

We will use a Toronto rental property that is a 2 bedroom and 2 bathroom $1,500,000 property:

·????????20% down payment, which is $300,000

·????????A 5 year mortgage, 25 year amortization with a 5.5% interest rate (they have gone up recently)

·????????Monthly mortgage payments are $7,370

·????????Property tax can be estimated at $500 a month

·????????Land transfer tax is not included, nor is general upkeep, condo fees etc.

With the numbers above, you would have to charge the tenants around $8,000 to break even on a monthly basis. ?

This is well above the going rate. Most 2 bedroom 2 bathroom apartments are under $4,000 a month when I did some research online (Zumper, realtor.ca etc.). Therefore, you would be short about $4,000 a month without accounting for general upkeep of the property. The breakeven down payment on a property like this is close to 70%. That means you would need to put around $1,000,000 down just to break even on the property. There is, however, the ability of the property value to increase or decrease over time.

Stock market investing

While there is a lot of market volatility, there are some attractive stocks which pay high yielding dividends, GIC rates have come up and there are some very attractive Bonds as well. ?

Below are some examples:

·????????Bank of Nova Scotia currently pays a dividend yielding over 6%.

·????????A 5 year GIC can yield over 5%

·????????Corporate bonds being sold at a discount to par.

Let’s use Bank of Nova Scotia (BNS) and a 5 year GIC as examples (rates are similar for shorter term GIC rates as well). If you were to invest the $300,000 into BNS, you would be able to purchase around 4,475 shares. The quarterly dividend received is $4,610, annually that is $18,440. This does come with some risk however, as the stock price can fluctuate. You would only have a loss or a gain when you sell the stock (same with selling a rental property). So, if you plan on holding the stock the dividend you receive would still be the same (BNS has not missed a dividend payment since 1833!).

There are many GICs “guaranteed investment certificates” that are now yielding over 5% for a 5 year compound GIC. For comparison’s sake, let’s say you purchase a $300,000 5 year 5% compound GIC (although always ensure your GICs are within CDIC limits per issuer), you will receive $382,884 in 5 years time.

There are pros and cons to purchasing a rental property and investing in the markets. With mortgage rates where they are right now, I think it is worth looking at compelling opportunities currently in the markets. There have not been opportunities like these in years.?

Disclaimer: This information has been prepared by Jonathan Gottesman who is an Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.