Real estate is one of the simplest ways to create long-term wealth that will fuel passive income well into your retirement. Whether you are a home owner or an investor, read on to understand why real estate might be the best investment strategy, when compared to some other options (such as the stock market)
1) YOUR APPRECIATION IS ON THE ASSET, NOT YOUR INVESTMENT
When you invest in stocks, your growth will be a percentage of your investment.
For example, you invest $20000 in stocks and a year later your portfolio grows by 5%. This means your profit on the investment is $1000.
However, in real estate, you will have the power of leverage. What does this mean?
EXAMPLE: Let's say you purchased a property worth $100000 with a 20% downpayment. This means your investment would be $20000.
A year later, if your property value has appreciated by 5%, your profit on it is $5000!. Even though your investment is $20000, your growth is based on the $100000 value of the house. This is the key behind using a small investment in real estate but making massive growth.
Appreciation in real estate is on the value of the asset, not your investment.
2) IT'S BEEN AROUND FOREVER AND IS SOMETHING EVERYONE NEEDS
Think about Hong Kong, London, New York, Paris and Tokyo. These cities have grown immensely over the last century and have essentially run out of land. This means that supply is short and demand keeps increasing.
Toronto is not quite there yet, but is definitely heading that way, perhaps within the next 15-20 years. The simple fact is...
Land is running out, but people are still coming.
Everyone needs a place to live. As a real estate investor, you are supplying a product that everyone needs. In Toronto specially, you are supplying a product that is getting increasingly higher in demand. This means your property values will grow and as a landlord, you will always have customers (i.e. tenants).
3) YOU HAVE A TANGIBLE PHYSICAL PRODUCT THAT YOU HAVE CONTROL OVER
In stocks, you have invested in an idea or part of a business, but don't really see it operating in front of you.
Real estate is a tangible physical product that is in front of you. You are completely in control of it. You can decide on several things such as long term or short term rentals or how you want to renovate/maintain it. And even when you want to sell it.
4) IT IS VERY SIMPLE, UNLIKE STOCKS
The idea behind real estate is simple. You have land and you provide it as shelter for someone.
With stocks, every company you invest in is different. You have to analyze the company and the target consumer market before making decisions. Furthermore, you constantly have to monitor the stock value. Sounds a little more stressful...
5) YOU CAN USE LEVERAGE TO FUND FURTHER INVESTMENTS
When you own a property, your wealth is increasing in multiple ways such as
- Equity (this is the part of your mortgage payment that goes towards the mortgage loan)
This growth in value can be used to create more funds to invest further in real estate.
EXAMPLE: You buy a property for $100000. Over a span of 5 years, it's value has appreciated to $130000. Furthermore, your equity has grown another $10000. So you now have a wealth increase of $30000 (Appreciation) + $10000 (equity).
With this information, you can go to a financial institution and ask for a Home Equity Line Of Credit (HELOC). This is a low-interest line of credit that the bank gives you, based on the value and equity in your property. You now have $40000 to invest.
Let's buy another property and keep this going?!
6) RENTAL PROPERTY IS TAXED AS A CAPITAL GAIN
If you decide to sell your rental property for a profit, only half your profit is taxed.
EXAMPLE: You bought a property for $100000. Over a span of 5 years, it's value appreciated to $130000 and you manage to sell it for that price. This means you have made a profit of $30000.
For Canadian income tax purposes, only 50% of that amount will be taxed. That means $15000 is yours tax-free and $15000 will be taxed as part of your overall income. That's right...
50% of your real estate profits are tax-free
7) PRINCIPAL RESIDENCE EXEMPTION ON HOME SALES: TAX FREE
If you decide to sell the home that you live in, you will be charged no tax on the profit!
Whether you are a home-owner or investor, putting your money into real estate has multiple benefits. Of course, there are several intricacies involved in purchasing and owning real estate. You want to make sure you make the right decisions and avoid any mistakes. Read below to understand more.