Purchasing and investing in real estate has always been attractive for those that are looking to generate additional income and benefit from the wealth created with increases in property values over time. Is investing in real estate right for you?
Diversification is key to anyone’s investment portfolio whether you are talking about mutual funds, TFSA’s, stocks, bonds, RESP’s, RRSP’s etc. Diversification helps balance risk and provides a level of confidence that your investments are still going to be there when you are ready to liquidate them, such as at retirement etc. Some would consider adding real estate, other than their principal home, to their portfolio to ensure full diversification.
A real estate investor can still use a relatively small amount of down payment or capital to purchase a property, and this can provide an attractive return on investment (or ROI). This return is generated from a combination of monthly income and property value increases.
The monthly income is generated by taking the rent collected from tenant and then deducting all the expenses. To ensure that there is a positive cash flow, smart real estate investors work with a mortgage expert and real estate agent that can assist with the analysis.
Equity is built in the property by way of appreciation of value over time as well as with each mortgage payment.
With mortgage interest rates at record lows and an abundance of potential tenants in many areas, there is a high demand for real estate investors to take the plunge.
Here’s another way to look at it as well… real estate investment is also beneficial for those who have a hard time saving money, as it can act as a sort of forced savings account. Essentially, as you pay down the principal of a mortgage, you’re reducing debt and building equity. Then, when you go to sell the property, the money you receive back from the sale is considered your “forced savings”.
So What is the Risk?
Like any investment, there is risk and it is possible to lose money in real estate, albeit relatively low. Real estate has shown to appreciate steadily over the long term, and has for the past 25 years, so the chances of someone losing money on a purchase are pretty slim. However, keep in mind that doing your due diligence before an actual purchase is key… you must take into consideration certain factors when choosing a property, such as desirability of location and stability of the market in that area.