Why Real Estate is a Unique Asset Class

Real estate has some attributes that are unique to this asset class. Here are ten of them:

1. You can rent real estate to third parties. (Try that with gold or stocks assuming you are not using exotic financial instruments.)

2. By renting to a third party you are benefiting from a ‘Wealth Effect’; every year a renter is paying off part of your mortgage for you—when you sell that property, the decrease in principal owing goes into your pocket (assuming that the price you sell for is more than what you paid for the property plus transaction costs).

3. You receive unearned (and untaxed) rent on self-occupied property after your mortgage is retired.

4. When your city builds infrastructure around you, when your neighbors improve their properties, when the density and overall area of the city increases, demand for your property increases without you having done a thing—as a result your property value benefits from positive externalities.

5. In many countries, you are allowed to deduct a non-cash capital cost allowance against income—a significant tax advantage from holding real estate assets.

6. Real estate generally doesn’t go out of fashion.

7. Land, unlike, say, ideas, is in fixed supply. (Many cities are further restricting supply by limiting urban expansion. Great if you are a sitting owner. Not so great if you are a first time homebuyer or newly minted entrepreneur.)

8. The amount of real estate consumed per capita has been steadily increasing almost everywhere for a long time.

9. In-migration to urban areas from rural areas is continuing everywhere as cities benefit from network effects so overall demand for urban real estate is increasing secularly.

10. Lastly, real estate offers you a unique opportunity to develop a sustainable business model even if you aren’t a genius. Real estate develops a ‘concession’ or ‘franchise’ for its owners because once you own a particular location, axiomatically, no one else can own at that location.

Everyone knows that real estate is all about LOCATION, LOCATION, LOCATION but perhaps people don’t realize why that is so crucial. For you to have a business that will nurture you and your family for a long period of time, you need to have some type of sustainable competitive advantage.

Imagine how difficult it is to run a company like Apple or how difficult it is to paint like Rembrandt. Not everyone can be Steve Jobs or create artworks like Rembrandt Harmenszoon van Rijn. Real estate held in fee simple (the highest form of title an owner can have) gives you a franchise forever that tough competitors like Microsoft or Apple or Google can’t take away from you—IT’S A BUSINESS MODEL FOR DUMMIES!

A friend of mine owns a great site at the corner of Woodroffe and Carling Avenues in the City of Ottawa. He comes from a tech background but his chosen personal investment vehicle is real estate. He and his partner built a new, high concept strip mall (not intended as an oxymoron) on top of the old foundation of a previous building and, because of its high traffic location, great visibility and design features, they get rents that are about 1/3 higher than other nearby properties. I mean how difficult can it be to own a great location and have people come up to you, one after the other, to offer you top dollar for your space, year after year?

Prof Bruce

Postscript: To read more about this, see: If I were King (or Queen) Of Exxon (http://www.eqjournalblog.com/?p=1311) and Why Invest In Real Estate (http://www.eqjournalblog.com/?p=434).

Bruce Firestone

Bruce Firestone

CENTURY 21 Explorer Realty Inc., Brokerage*
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