It has been said that over 90% of all millionaires got started in Real Estate - there must be a reason!
The beauty of Real Estate is that you are purchasing and have control over a hard asset.With the majority of investments, you are purchasing the value of a company or a group of companies that you have no direct control over. With that in mind, let's explore what Real Estate - even your personal residence - offers when compared to traditional investments. The important thing to realize is that Real Estate offers at least 4 very seperate profit centers, as opposed to the typical capital appreciation that traditional investments offer, and they are;
This is one of the staples behind Real Estate investing. It works like this - if you had $100,000 to invest, and you bought $100,000 of mutual funds which increased in value 5% over the next 12 months, your ROI (Return on Investment) would be $5,000, or 5%. However, if you had used the same $100,000 to buy Real Estate, everything changes...and here's why. That $100,000 investment will allow you to purchase a $500,000 piece of Real Estate because you get to use the bank's money via a mortgage along with your own. This allows you to make a ROI on the bank's money! That $100,000 investment turns into a $500,000 property, that if increased only 3% over the next 12 months, is now worth $515,000 - a $15,000 increase, or a 15% ROI compared to the 5% from stocks! Even though the property increased in value at nearly half the rate of the stocks, the real estate still returned you 300% as much as the stock investment, simply because of leverage! But, there are other profit centers as well!
We are lucky to live in an area that offers some of the best cash flow opportunities in all of Canada based on purchase price. Very simply, the cash flow a property provides is the net cash left over after your mortgage, taxes, insurance, repairs and maintenance, property management, reserve fund, vacancy allowance and advertising have been allocated for. We are seeing many investors from out of town buying up properties in Northeastern British Columbia because the cash flow is so strong in this area compared to the region they live in.
Every time you make a mortgage payments from the income of the property, you are paying off a portion of the balance. This amounts to equity being built and is an additional profit center. This is one of the reasons, along with cash flow that you can still make money in a flat Real Estate market.
Anytime your property increases in value, it is called appreciation. Many factors come into play regarding property values, but it all boils down to supply vs. demand. When more people are buying homes, the price for those homes will increase, and vice versa. A few of the factors that determine local supply vs. demand are population growth figures, average income, major employers or projects coming to town, government policies affecting business, interest rate trends and more. These influences should be considered before making any investment decisions. Further, often appreciation can be 'forced' on a property by doing renovations, increasing the rental revenue, and more.
After these 4 profit centers, real estate also offers specific tax advantages compared to traditional investments. With a house that increases $100,000 in value, you generally only have to pay taxes on 50% of that increase when the property is sold. In the case of a property that you live in personally, the tax advantages are incredible - in this case, all increases in value are totally tax exempt! Further, you can deduct, as an expense, property taxes, insurance, repairs, inspections and depreciation on your investment real estate - no matter how much you own! In addition, it is even possible to buy real estate with none of your own money, even if your credit isn't spectacular - however this process will be covered in another article.
A properly built and managed portfolio of cash producing real estate can quickly provide you with enough passive cash flow that you will never need to work again, while still building your net worth through the other 3 profit centers of leverage, mortgage pay down and appreciation. Did you know that Fort St. John has been ranked as the #1 town to buy investment real estate in all of British Columbia by the Real Estate Investment Network from 2004-2008, and we continue to be in the list of the top 10 towns for 2009? Let's take a look at what some other people are saying about investing in Real Estate;
"Don't wait to buy Real Estate. Buy Real Estate and wait." - Don Campbell, President of REIN
"Over 90% of all millionaires become so through owning Real Estate." - Andrew Carnegie
Contact Mitch today for additional questions about investment Real Estate!