I have been reading and looking into real estate investing for many months now. I’m trying to see boths sides of the story, but for this post I want to talk about why I think it’s great.
Here are 5 reasons why I think anyone should be looking into investing in real estate.
Stocks, bitcoin, bonds all exist, but can you touch them, stand on them, or build on them? No. While they can be great investments, they are abstract. Real estate is REAL, and here are the unique qualities of a REAL investment.
Land is limited. Period. Yes, we might move to Mars in the future, but for now, land is finite. Toronto has a geographical border. Montreal Island isn’t going to grow bigger. As the population grows, the demand will grow as well. With a re-elected 2019 Liberal minority government, Canada immigration isn’t projected to decrease. Growing demand with a finite supply will only result in higher prices.
This is different from stocks. A company could simply issue more of their stocks, inflating their supply. Governments can similary create more bonds, etc. You can’t just create land out of thin air, unless you are China.
Can you upgrade your stock or bonds? No. With real estate, you can do renovations that will increase the value of your property. Put renovation tax-exemptions on top of that, and you have a great
If you want a portfolio that doesn’t drop 50% overnight, you may want a diversification. Diversification is basically having your eggs in many baskets. Having $100,000 stocks in Amazon is good and all, until the one day the giant messes up and their stock plummets. Having $100,000 in 100 different NASDAQ companies may not be as exciting, but your total value won’t be so much affected by one single company’s devaluation.
Vanguard ETFs are the craze these days with their managed diversified funds. I have them too, and it’s nice.
So how are real estate investments different? First of all, the core concept is different. When a company underperforms, their stock goes down. For real estate,property values are not dependent on a company. In a nutshell, it all comes down to supply-and-demand. As long as there are people living in a city, they are going to need shelter. More people means more demand. Less means less demand. That’s where the simple part ends. The complication begins with how the government policies affect the supply. Tax exemptions, development incentives, zoning laws, referendums, political ridings, interest rates, legal disputes… They all play into how many developers are willing to build residential units.
Here is a concept - the Correlation Factor. Correlation basically measures how two investments change over time in comparison with each other.
Real estate and stocks don’t have a high correlation, so having some real estate in your portfolio will only add to the diversification of your portfolio. Simple as that.
Here are the different ways you can invest in real estate:
- Residential rental properties
- Commercial properties
- Real estate investment trusts (REIT)
- Real estate mutual funds
- Real estate exchange-traded funds (ETF)
Real estate is basically an inflation cushion. Average price of rent for a 1-bedroom apartment in Montreal was $458 in 2000. It rose to $627 in 2010. It rose further to $720 in 2018. Source. That’s inflation happening right there. Majority of the apartments are the same. I mean, have you seen some of the apartments in the McGill ghettos? It’s the renters that are paying more money for the same thing! The landlords are shielded from inflation by passing on the toll to the renters.
With savings / stocks, you won’t have the protection against inflation - unless you earn more than the inflation rate.
Here is an example. Let’s say your stock portfolio averages 6% in annual return. The Canadian dollar inflation averages 2- 3% every year. Assuming 2.5% inflation every year, your portfolio is actually gaining 3.5% after inflation. If your portfolio performs less than 2.5%, you are losing money.
What about real estate? From Oct 2004 to August 2019, Montreal real estate has averaged a 3% year-over-year growth, so let’s assume 3% annual growth. That’s not much after inflation, but you need to take into account the rent, equity, and tax write-offs for the full picture.
The point is that with real estate, you are naturally poised against inflation because over the long term, prices tend to rise, not fall.
As the cost of maintaining / repairs rise, so does the rent. This allows the landlords to put the burden of inflation on the renters.
Want rapid growth? Invest in stocks.
Want low-risk, reliable income? Invest in bonds.
Want both? Invest in real estate.
Real estate gives you the benefits of cash flow AND appreciation in value.
Cash flow can come from rent.
Appreciation not only comes from outside-sources like the economy, growing demand, and government policies, but also from internal work like renovation and repairs.
In Canada, the capital gains of your primary residence are tax-free. This allows you to quickly grow your investments step-by-step. For stocks and bonds, your gains are taxed.
That’s all. Hope you guys learned something. Cheers.