WHY INVEST IN REAL ESTATE?
There are many benefits to investing in real estate vs other forms of investments such as stocks, mutual funds, bonds, and RRSPs. Some of the great benefits are:
Let’s say you have $50,000 to invest. You choose to invest in a mutual fund that may have an annual return of 2-4% depending on market conditions. Over a 25 year period at a rate of 4% your initial $50,000 would be worth $135,000. Let’s say instead you use your $50,000 to purchase a $250,000 property (20% Deposit). Right there you have just leveraged $200,000, which over the term of a 25-year mortgage would be paid off by the tenant. So not including cash flow and appreciation, your initial investment would be worth $250,000 over the same 25 year period.
Once you’ve utilized the power of leverage and acquired an investment property you’ll start to notice the next great benefit, principal reduction. Mortgage payments are typically made up of principal and interest and normally set over a 25-30 year period. As you make mortgage payments with the rent collected from your tenant the remaining principal on the mortgage starts to decrease, thus building what we call equity. Using the same example as above, (not including positive cash flow and appreciation) after the first 5 years of the tenant paying down the principle and interest on the mortgage you would have generated approximately $27,000 in equity which is equal to an extra $450 a month in your pocket over the same 5 year span. This equates to an 11% per year return on your original investment of $50,000. Imagine what you could do over 25 years!
There is a saying in real estate investing “Cashflow is king!” Positive cash flow is the amount of money you are left with after all your investment property expenses are paid. Positive cash flow can greatly increase your R.O.I. over a long-term investment. It’s also extremely beneficial to build up a surplus for future maintenance on a property or even a deposit for your next investment. Another option often used by sophisticated investors is to take advantage of equity built up in the property by refinancing for a longer term to reduce the payment amount and generate a higher rate of cash flow.
How does appreciation work? An example would be Calgary between 2005-2017, property prices have increased at an average of over 8% per year (don’t take our word for it, see the Canadian Real Estate Association CREA Home Price Index). That’s also taking into consideration the lows generated by the economic downturns of 2008 & 2009, as well as the positive upswings pre-2008 as well as between 2010-2014. Based on 8% appreciation, let’s say you invested your $50,000 to purchase a $250,000 property on a 30yr mortgage, (using the power of leverage) at the end of the term it would be worth just over $2.5million. Run the numbers!
Other benefits of investing in real estate include:
Low minimum investment
Growth where strong local economies exist
Lots of tools available to self manage