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I had three meetings this past week with Canadian clients where I challenged their real estate strategies. Here’s why.
Real estate investing has its merits. And certain markets have performed exceptionally well in Canada over the past generation. But sometimes, especially as you approach retirement, you should reconsider your real estate strategy.
Some Canadian investors look to real estate over stocks because they perceive real estate to be a better investment. I do not think it is better or worse—simply different.
This year has been a volatile one for stocks, and many think it’s been a bad time to invest in the markets. The S&P/TSX Composite Index has returned 3.53% including dividends year-to-date through May 9, and 16.75% over the past year. The S&P 500 in the U.S. has not fared as well, losing 6.40% year-to-date in Canadian dollar terms (in part due to the U.S. dollar falling) and returning 11.91% over the past year.
So, a North American–focused stock investor may be down slightly in 2025 but would have a double-digit return over the previous year.
If we zoom out further, the 10-year total returns for the Canadian and U.S. indices were 8.53% and 13.89% annualized. Most investors would have earned less, though, due to investment fees and by holding bonds as well as stocks. But high single-digit returns were certainly there for the taking.
How about residential real estate? The MLS Home Price Index aggregate composite change was 5.52% annualized over the past 10 years. A rental property investor in Canada might have earned 2% to 3% more from net rental income, based on rental income minus rental expenses excluding mortgage. Leverage would have helped, since the five-year variable mortgage rate averaged 2.79% over that 10-year period. Borrowing at 2.79% and investing at roughly 8% all-in leads to a profit.
As a result, the average residential real estate investor over the past 10 years with a mortgage on the property probably earned a high single-digit return, comparable to an investor with a high allocation to stocks.
Stock market returns and Canadian real estate appreciation over the past 10 years were both relatively high, and interest rates were relatively low. Going forward, with moderate interest rates and stable inflation, a balanced portfolio of stocks and bonds should probably provide a rate of return comparable to that of a rental property.
If you forgo contributions to tax-preferred accounts like registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) to invest in real estate instead, this could hurt your after-tax wealth accumulation. Rental property investing may be best suited for someone who has already maxed out their RRSPs and TFSAs and has a decent allocation to stocks and bonds, to provide diversification.
Real estate is great in retirement because the income tends to be predictable, and it rises with inflation, like an indexed pension. People may prefer these investment merits over stocks that can be volatile day to day, let alone year to year. The key for stock investors in retirement is to remind yourself not to sell your stocks all at once—ideally, you should be withdrawing a low to mid-single-digit amount from your portfolio every year, part of which will come from dividends and interest anyway.
There are two reasons to be careful about buying real estate that you might need to sell early in retirement.
Real estate is not always liquid. Sometimes, it can take longer than you would like to sell a property because the market is soft and you have to be patient. And with real estate, it is all or nothing. You cannot sell just a garage or a basement apartment—you must sell the whole property.
Transaction costs to buy and sell real estate are also significant. Everywhere but Alberta, Saskatchewan and the territories has land transfer tax. A buyer in Toronto might pay 3% all-in with municipal and provincial land transfer tax.
Real estate commissions to sell a property can be 5% or more, especially in Atlantic Canada or rural communities.
Adding in legal fees and incremental purchase and sale costs, an investor might pay 10% of the property value to buy and sell it. If these transactions happen 10 or 20 years apart, their impact may be negligible. But if they happen five years apart, especially during a period when prices do not increase much, you could negate most of your potential investment return.
As a result, an investor should be careful about buying a rental property they might need to sell early in retirement. Investors should also avoid waiting too long to sell when they are running out of more liquid assets like traditional investments.
A lot of baby boomers have benefited from real estate price appreciation. They have also seen their children have a hard time buying real estate. As a result, some parents go out of their way to leave a real estate inheritance to their children, whether by purchasing rental properties or holding on to a cottage or a family home.
If a senior prioritizes keeping real estate over other investments, they run the risk of drawing down their RRSP or registered retirement income fund (RRIF) heavily, which could lead to higher tax earlier in retirement or a reduction in government means-tested benefits like Old Age Security (OAS).
Focusing on real estate can also reduce diversification if more of the senior’s net worth shifts towards that and away from stocks and bonds. This has risks if real estate does not perform well.
My advice if you want to help your kids financially is to focus on maximizing your estate value as opposed to trying to maintain specific assets you think your kids might want. Although a child may want to buy real estate, they may not want to keep the real estate you intend to leave them. And arguably, they could also benefit more if a parent helped them buy real estate today rather than leaving them real estate as an inheritance in the future.
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Is real estate the best investment for a retiree? To me, that is like asking: should I buy Apple shares? Both answers depend on the big picture.
If you have maxed out your RRSP and TFSA, and you can buy and hold a rental property for the long term without it making up too large a proportion of your net worth, sure, it is one way to invest. It may provide a comparable return to a low-cost balanced portfolio of stocks and bonds over the long term.
The stability of real estate may be appealing to some investors. And many people find real estate easier to understand than stocks, and this may make it a more comfortable way to invest. But whether real estate is the best investment for a retiree is dependent on the situation of the individual.
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