Dwight Streu's Top 6 Reasons for Owning Real Estate
My Top 6 Reasons for Owning Real Estate
Are you wondering where to invest that extra cash you have? Here are some reasons you may want to consider investing in real estate.
We probably all know people who have built wealth by investing in real estate. But it is not for everyone. If you want a completely hands-off investment, real estate investment is probably not for you. But if you are willing to be a little hands-on, real estate can provide some great investment benefits.
FIRST off real estate gives you the ability to leverage your cash investment. Let's say you have $25,000 in cash to invest. If you invest that in the markets and get say a 5% return you've made $1,250 on your investment. But let's say you invest that $25,000 as a downpayment on a $250,000 property. If that property appreciates by 5% you've made $12,500 or a 50% return on your $25,000 cash investment. In fact, if the property only appreciates by 2% you've still made $5,000 or 20% return on your initial cash investment.
Now, there is no guarantee the property will go up in value, but there is no guarantee your other investment will go up in value either. Some people think real estate never goes down but it can and does. Normally, however, over a longer period of time, it will appreciate and that's why I never recommend real estate as a short-term investment. Sure, you could make money but there's also more potential to lose money. Over the past 15 years, real estate prices in Canada have appreciated just over 6%, but that's an overall average. Some areas and some property types have gone up more and others have gone up less.
A SECOND benefit to real estate is it acts as a natural hedge against inflation. Real estate prices and real estate rents will normally appreciate with inflation or even outperform inflation so if you are collecting say $1200/month in rent now, 20 years from now you should be collecting the equivalent rent when adjusting for inflation. In other words, inflation does not take a big bite out of your return as it can with other investments.
THIRDLY with real estate, someone is helping you pay for your investment. You are mostly using other people's money. Here's what I mean. Again we will use the example I just mentioned. You invest $25,000 of your own money and borrow another $225,000 of the bank's money. You are going to use the rental revenue the property generates to pay off the $225,000 loan from the bank. So even if your property never appreciates at all, your $25000 investment will result in a paid-off property worth $250000, and once it's paid off that income is now yours to use as you wish - perhaps to fund your children's educations or your retirement or whatever you want. But of course, it's highly unlikely the property is only going to be worth $250000. In fact, if it only appreciates at 2% a year, it will be worth $410,000 after 25 years. If your rental income was $1,200 /month when you started and rents rose at 2% a year, you would have a rental income of just under $2,000 /month. So your $25,000 investment has now provided you with a paid-off property worth $410,000 that is also generating you $2,000 in monthly income. Multiply that by 2 or 5 or 10 properties and you can quickly see why so many people have utilized real estate as a vehicle for building wealth.
FOURTH real estate offers the potential for very large returns. You've probably all heard of how much real estate has appreciated in some markets during Covid - over 30% a year in some markets! Now, certainly financial markets have done well during this period of time as well, but remember the principle of leverage. In our example, if your property went up 30% that would be a $75000 increase on a $25,000 investment. The same 30% return on your $25000 in the financial markets would be $7500. Now I want to be clear these are not common everyday returns. You certainly can't count on them. I'm just trying to show the potential that does exist for large returns.
FIFTH - Another thing I like about real estate is that it is stable. Again that's not to say it never goes down in value, but it doesn't go down quickly as financial markets can. You don't wake up one morning and find your property went down in value 10 % overnight. Real estate values typically move slowly both up and down.
Lastly, Number SIX- Real estate investment allows you to defer taxes. What I mean by that is your appreciation is not taxed until you sell the property and realize the gain. So it's been allowed to accumulate tax-free much like an investment in an RRSP.
Those are My Top 6 Reasons for Owning Real Estate and if you are wondering, yes, I do invest in real estate myself but I do not buy and flip - not that you can't make money doing that - you can. But I believe buying and holding is a safer way of building long-term wealth. If you have questions about buying an investment property, don’t hesitate to reach out to me.
~ Dwight Streu
You can always email: Dwight@DwightStreu.com or text or call me (Dwight) direct at 780-233-5293.