Even as borrowing rates rise, real estate wins. Here’s why.
With a world of options available to today’s investor, it can be hard to know what will produce the greatest bang for your buck. What follows are the reasons why, in my opinion, real estate is still the investment champ.
1. Real estate offers a significant human service.
Shelter is one of humanity’s most basic needs. As a landlord, it’s an honor to provide a safe, secure, and dry space for others to live and love and work and build relationships. Showing genuine care for tenants, taking pride in a property, and maintaining it with dignity can create great satisfaction.
2. The demand for real estate is permanent.
People will always need a place to live or work, meaning your investment property will always have interested renters or buyers. Housing is not a fad, land will always have value, and the demand for real estate will not go away.
3. Real estate offers a measure of control.
As an investor, you have the power to set rental rates, screen renters, determine upgrades, and even choose the paint color. You can physically see and touch your investment, inspecting it as you wish. Other investment classes, such as the stock market or venture capital, offer limited control and transparency — sometimes almost none at all.
4. Real estate investments create passive streams of income.
To acquire a desirable property is to acquire a (generally) permanent and ongoing flow of passive income. Even if you don’t net a dime of positive cash flow in the short term — meaning all you’re doing is breaking even on expenses each month — the payments made against the mortgage principal mean you’re steadily building equity. The more you replicate this activity, the more equity gained, even if your chequing account looks as tight as ever.
5. Market appreciation is reliable over the long term.
Sometimes the market is hot, like three years ago when our Pacific northwest home appreciated over 30% in one year. Sometimes it’s cold, like this year and for the foreseeable future as rising interest rates lower the purchasing power of buyers, and the market predictably sags.
But regardless of the ebbs and flows, North American real estate shows a steady appreciation over time. Choose any 10-year window in any market and you’ll find measurable appreciation. In real estate hot spots where mountains, ocean, international boundaries and other factors combine to limit the growth of new development, market appreciation is even more of a guarantee. And when the market explodes forward as it did in the Lower Mainland of BC in 2015, the equity gains can make anything in the stock market pale by comparison.
6. Investment property improvements are tax-deductible.
Let’s say you invest $20,000 to upgrade your kitchen in your own home. It looks great, and you love the upgrade, and it may even add market value to your home — but there’s no tax advantage to be realized there. On the other hand, when you make similar improvements on a rental property, those investments count against any taxes that you would normally pay on your rental income.
Governments set these policies to encourage landlords to maintain their properties and provide better quality housing for their renters — a great example of humane public policy. As a landlord, you gain by adding value to your investment property while rightly avoiding taxes at the same time. Win-win.
7. Real estate investments produce incredible leveraging power that other asset classes can’t match.
This point may just be the best of them all, and it’s one that your stock market friends forget about. Think of it this way.
Let’s say your pension fund is worth $500,000. Can you visit your local lender and ask her to use your pension funds as collateral for a $100,000 loan? Absolutely not. But trade that $500,000 bundle of investments for a property with equity of $500,000 in it, and the bank would be only too happy to issue the $100,000 loan (using the property as collateral).
As your real estate investments appreciate and gain equity over time, banks and other lenders will allow you to borrow against those properties (usually up to 70–80% of the equity in the property, depending on the lender). And to make this dynamic even sweeter, there’s an accumulating effect.
Imagine this scenario. Let’s say you invest in Property A. After a few years of payments on the mortgage principal + market appreciation there is significant equity growth in that property. You could then borrow against that equity to invest in Property B. The cycle repeats itself, although slightly faster this time, because now there is equity growth in not one but two properties. A few years later, you visit the bank again to borrow against A and B, and you purchase property C. And so on, and so on.
Other investment classes don’t allow you to borrow against them in this same way. And so that cumulative or multiplying effect is lost.
Some Admissions
There are a few points I’ve oversimplified here for the sake of argument. Yes, it’s possible to overpay for dilapidated properties. Yes, it’s possible to purchase properties in remote areas with dubious potential for appreciation. Yes, it’s possible to purchase properties in overpriced markets that can’t hope to generate sufficient rental incomes to cash flow positively. Other risks, including bad tenants who may inflict significant damage on properties, certainly exist as well.
In Summary
All of these disclaimers aside, I’m supremely confident in the power of this asset class to win the day. Done right, real estate offers permanent value, good control and visibility, steady income, reliable appreciation, tax advantages, and a multiplying effect that other assets can’t match. I’ve seen what it can do in the past, and I intend to see what else it can do in the future.
Have you got a strong yay or nay response to my thesis that real estate is still the best investment class? Throw your hat in this discussion by commenting below, and thanks for reading.
Tim Cavey 