Why Invest In Real Estate
The four unfair advantages of the Real Estate Investor
Leverage, Control, Stability, and Scarcity.
If you’re reading this, you probably already know that investing isn’t a luxury, it’s a necessity because inflation is costing you money. If you leave your money in a piggy bank, low-interest savings account, or under your mattress, your future wealth is being eroded at about 2% per year. Just to keep from losing money, you have to invest in something. So Why Real Estate?
If you want a portfolio which you can sell off at a moment’s notice, REI is not for you. If you want something to casually toss $100 a month into, REI is not for you. If you’re a patient, hands-on investor with enough up-front resources to overcome the high barriers to entry, Real Estate is a no-brainer.
Leverage
Let’s say you have $20k to invest. You could put it in Mutual Funds, Bonds, GICs, or a self-directed stock portfolio. As a basis for comparison, consider that the S&P 500 returns an average of about 10% every year. At that rate of return, you would earn $2k on your $20k. Not terrible but we can do a lot better.
Let’s instead consider how that same $20k can work for you by investing in Real Estate. Assuming a 5% down payment on a property, your $20k can be leveraged into an asset worth up to $400k. In Canada, the average annual return on Real Estate is about 5%, meaning your $400k Real Estate Investment will appreciate by $20k. That’s a 100% ROI in the first year. Granted, there are very steep transaction costs which would likely eat up all of the return if you were to sell in the first year but it goes to show the power of leveraging and what it can do for your wealth.
After the property has appreciated by at least 5%, you can refinance it and take your initial investment back out in cash. So now you’ve got an asset worth $420k, appreciating at 5% per year, and no money tied up in it. You can’t sell it right away due to the transaction costs but why would you? You’re in the enviable position of earning infinite returns.k
Control
Any investment is measured on risk vs return. Real Estate gives you an unparalleled level of control over these factors and for many, this is the reason they choose to invest in it. When you own an income property, you have the ability to make changes as you see fit such that the property might yield better returns or mitigate risk factors. If you think you can get more rent for a unit and are willing to risk it sitting vacant for a month to make that happen, go for it. No one is stopping you. If you want to invest in renovations so as to increase the property value before you sell, fill your boots.
The level of control afforded by a traditional stock portfolio pales in comparison to Real Estate. Rather than competing with other shareholders to effect change, you can just go ahead and do it. When you invest in an investment property, you are in the driver’s seat.
Stability
Real Estate is a highly illiquid asset with a high barrier to entry. For those reasons, RE investors tend to hold for longer which contribute’s to the class having a lower overall volatility compared to assets whose transaction costs are so low that they don’t act as a deterrent to high-volume trading. This means you don’t need to time your transactions perfectly. It also makes it easier to predict the market as it is less speculative in nature than equities.
Scarcity
We aren’t making more land. Real Estate has inherent scarcity and is virtually guaranteed to increase in value over a long enough time frame. Generally speaking, a 5-year holding period is enough to be near-certain that the Real Estate market will see great returns. The same cannot necessarily be said for individual properties as they are all unique but that’s why Due Diligence is a vital process when vetting a property and why my team puts research first.
Given that real estate is a scarce resource and a necessity, as long as the population of the local area continues to grow, so too will property values.
Andrew Baker is a Registered Realtor and Real Estate Investment coach with a proven track record of leveraging the four unfair advantages of Real Estate for his clients. Connect with his team on Facebook and Fluxrealty.ca for more investing protips and 1-on-1 consulting.
