I was speaking to a good friend of mine recently, and we were discussing different asset classes you can invest in (like Real Estate, Stocks, Commodities, etc). She hadn’t invested in Real Estate before, and asked me why I liked it, and why I had divested from stocks & mutual funds in favour of investing in rental property.
Real Estate is Easy to Understand
You buy a property, and someone either works in it, or lives in it, and pays you rent. That’s the business model. Simple.
If you are investing in stocks, it’s a little more complicated than that. I used to think I understood the stock market, back when I worked at a large investment brokerage in high school. I realize now that I don’t, and almost no one does. Let’s take a look at RIM’s stock as an example.
RIM is a great company. I love their products, I love their employees that I know, and I know they have a great culture. They are always hiring more people (another 3,000 last I heard) and buying/developing more office buildings. From what I understand, profits are healthy, as is market share.
Somehow the stock is down to $76, from a 52 week high of $150. Huh ? If business is good, why is 50% of the value gone ? Since I can’t answer that question, I don’t buy the stock (just their Blackberrys!)
Real estate is an Investment you can see & touch
- You can physically inspect the quality of the real estate asset you’re investing in. You can walk the neighborhood, talk to the neighbours, and see what the ‘facts on the ground’ are before investing.
You can Leverage your Equity when Investing Real Estate
- Most people don’t pay all cash when they buy a house – they have a down payment, and borrow the rest as a mortgage. This means you can leverage your capital and purchase 3-10 times as much value (i.e.If you have $25,000 you can likely purchase a $100,000 property), with the bank or a lender loaning you the rest. You receive 100% of the growth in the value of the property, even though only a percentage of your equity controls the investment property.
There is a constant demand for real estate
- People need shelter. Real Estate is where you live and work. The chance that people in our Canadian climate will no longer need to live indoors is slim to none. Until then, they need somewhere to rest their head, and it might as well be your condo. I like that sort of security when I’m investing my money.
You can improve the value of your investment with sweat equity
- Real Estate offers you the opportunity to physically improve the property, thus increasing the value of the asset. If you take a property that is renting for $1000, and maybe only needs new flooring and a coat of paint to raise the rent to $1200, you have increased the value of the property by tens of thousands of dollars (depending on the income to price ratio in your area)
Try doing that with your Nortel stock, or your Derivatives of Credit Default Swaps.
Your Real Estate Investment can put a roof over your head if needed
- Many people make their first investment in Real Estate as their first home. They’re putting their money into an asset, and they can also enjoy the benefit of living in their own home.
Real Estate has a basic value
- There is only so much land in the world, and they ain’t building any more of it. When you own a property, there is value in the building, and in the land. The building may come and go – eventually needing to be replaced after many decades or even centuries in some cases – but the land will always be in demand.
What are some of the reasons you like to invest in Real Estate ? Leave them in the comments or email them to me!
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