Many people want to own real estate. People seem to know intuitively that it is a good investment. But what are the logical reasons that you should consider investing in real estate?
- Canada is a stable, attractive country
Canada is a free and democratic country that is attractive and welcoming to immigrants. Immigration coupled with Canada’s birth rate means that Canada’s population grows about 1.2% per year. Toronto and Vancouver are destination cities and as such are not affordable for most Canadians, but there are lots of smaller cities in Canada where real estate is affordable. Real estate anywhere in Canada is generally attractive assuming you pay a fair price for what you purchase. As Canada’s population increases, there are more and more people wanting to buy property here.
- Low mortgage rates support real estate ownership
Since 2008 low interest rates have been a reality. Given the current global uncertainty, it seems unlikely rates will increase significantly any time soon. Low interest rates translate into affordable monthly payments. Low carrying costs make it less risky for you to own real estate. The less you have to cover, the less you have to charge in rent to make your investment cash flow positive.
- Real estate earnings are taxed preferentially
Real estate is one of the few investments, aside from owning your own business, where you can write off part of the cash flow you receive. Your principal residence is generally tax exempt in Canada, and investment property is also taxed preferentially. You can depreciate your rental house or building as long as you own it. That depreciation expense usually eliminates or minimizes any income tax you would otherwise owe on your income from your property, hence providing you with free cash flow that is not taxable upon receipt.
- Leverage can be used when purchasing property
Most people pay for their real estate partially through savings and partially through mortgage debt secured against the property. This means that with savings of about $50,000, you can generally purchase a property worth $200,000. You pay the $50,000 down and take out a mortgage for the $150,000, thus purchasing an asset worth four times your savings. If the property is a rental property, then ideally your rental income pays the monthly payments on the mortgage until the mortgage is paid in full. Hence you are using leverage to purchase an asset worth more than the amount of your savings.
- Real estate ownership gives you control over your investment
A lot of people fret and worry when they give someone else control of their money. The beauty of owning real estate is that you control the investment. You own the property and you are the only one who can determine what happens with that property. You choose the house or building you wish to purchase; you decide to whom you want to rent your property; and you manage and fix it up the way you want to. You have control over every decision to be made.
- Your actions can add value
Real estate can be a very active investment. If you are handy and knowledgeable, you can purchase a property in need of renovation or fixing up or demolishing or subdividing. That type of repositioning of property has the potential to dramatically increase the value of what you purchased, sometimes doubling or tripling the value of your initial purchase price. It is gratifying when your direct actions increase the value of what you purchased.
- Property makes a good long term investment
Real estate historically goes up. So long as you intend to hold your property long term and ensure the carrying costs are affordable for you to hold it long term, the odds are that your real estate will be worth far more, often many multiples more, when you want to retire than when you purchased it. This makes it a great way to create wealth over time.
- Land is a fixed resource
“Buy land, they’re not making it anymore” said Will Rogers. That quote still applies today. Any freehold purchase you make takes advantage of the scarcity of land. There is a fixed amount of it so the more people want it, the higher its value because the supply is fixed.
- Real estate should continue to make you money when you are sleeping
If you are smart and a bit lucky, your rental real estate investments should become passive investments over time such that they make you money when you sleep. The objective is that your property should provide free cash flow without your having to put hours in to make that money, and your property should increase in value year over year, creating capital gains.
It is comforting that our visceral belief about real estate being a good investment can be backed up with logical reasons why that belief is true.