Why Invest In Real Estate?

Real Estate has historically proven to be the best long term investment, encompassing high yields with minimal risks (when compared to most other investments).

"Don’t wait to buy real estate. Buy real estate and wait" - Various

"Real estate is the basis for all wealth." -Theodore Roosevelt

"Buying real estate is the best, safest way to become wealthy." - Marshall Fields

"90% of all millionaires made it through real estate." - Andrew Carnegie

Benefits of Real Estate Investments?

Leverage
Compound Interest
Multiple Income Streams
a) positive cashflow,
b) mortgage pay down and
c) equity appreciation)
Tax advantages
Wealth Creation
Combat Inflation

1) Leveragabilty: Leverage is probably the largest differentiating factor that sets Real Estate investments above other investments. Because of its proven history for long term appreciation and security, there are multiple banks/lenders who will gladly give a loan of 80%+ on a well selected piece of property. What makes leverage so powerful?
A few basic examples are as follows:

Ex 1: House Purchase – cash versus loan
House for sale $200,000

A) No leverage: Investor A purchases house with $200,000 cash
House appreciates 5% in one year.
Investor A sells house for $210,000 ($200,000 x 1.05).

Profit = $10,000 (sell price – purchase price = $210,000 - $200,000)
Return on Investment (ROI) = 5% (profit/initial cash investment = $10,000 / $200,000

B) Leveraged: Investor B purchases house with a conventional 20% down payment ($40,000 down, $160,000 loan)
House appreciates 5% in one year.
Investor B sells house for $210,000 ($200,000 x 1.05).

Profit = $10,000 (sell price – purchase price (assuming no mortgage pay down) = $210,000 - $200,000)
ROI = 25% (profit/initial cash investment = $10,000 / $40,000

As seen from the example above, the profit of investor A is the same as investor B, but the ROI of investor B is 5 times that of investor A’s. Now, if investor B were to invest the same initial amount of cash as investor A, he could purchase $1,000,000 worth of property and substantially increase his profit.

Ex2: Stocks/mutual funds versus Property returns

A) Investor A buys $20,000 worth of stocks/mutual funds. Shares go up 15% in one year.
B) Investor B uses the same $20,000 for a conventional down payment to purchase a $100,000 rental property.. House appreciates 5% in one year.

Which investment performed better?

Investor A:
Profit = $3,000 ($20,000 x 1.15 = $23,000, $23,000 - $20,000 )
ROI = 15% (3,000 / 20,000)

Investor B:
Profit = $5,000 ( $100,000 x 1.05 = $105,000, $105,000 - $100,000)
ROI = 25% (5,000 / 20,000)
(Example includes equity appreciation only. Doesn’t include positive cashflow or mortgage paydown)

As seen from the above example, the rental property provided better returns than the stocks/mutual funds with only a 5% increase compared to 15% on the shares. In fact, the rental property, asumming break even cashflow and no mortgage paydown, would only need to increase by 3% in order to provide the equivalent returns provided in shares increasing by 15%. This is the power of leverage!

2) Compound Interest: Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e. interest is compounded). Examples below:

Example 5 year investment of $100,000 at 5% annual interest rate

	Non Compounded	Compounded
Year 0	100,000	100,000
Year 1	105,000	105,000
Year 2	110,000	110,250
Year 3	115,000	115,763
Year 4	120,000	121,551
Year 5	125,000	127,628

As seen from the example above, compounding becomes increasingly beneficial the longer the investment is held.

3) Multiple Income Steams: Unlike most other investments, properly selected/managed real estate investments benefit from three income streams:

a) Equity Appreciation: Over the past 80 years, real estate values have been on an upward trend. There have been, of course, some periods where the values have decreased, but looking at these times over an 80 year trend, they look like nothing but insignificant blips.

Like anything else, the value of real estate is determined by supply and demand. So what are the factors that have made real estate in such high demand over the years?

One of the largest factors is that shelter is a basic human need. People need places to live, work, and shop, where they are protected from the elements of weather. Another large factor is that we only have a limited amount of land on our earth. As long as humans remain on earth and we want roofs over our heads, there will always be an increasing demand for real estate.

b) Positive Cashflow: This is the left over monthly cash from the monthly rental income after all property expenses have been paid

c) Mortgage Pay down: The amount of principle that the mortgage is paid down by the tenants.

4) Tax Advantages: There are many tax advantages in real estate investments. Some tax deductible expenses are as follows: Interest on Mortgage and other borrowed funds towards the property, property taxes, insurance, repairs, inspections, professional costs, and others.

5) Wealth creation: With approximately 90% of all millionaires having claimed their fortunes through real estate, there’s no question that it would be the most likely investment vehicle to provide similar success to you. Don’t have the time? Send us an email. Help us, help you!