Why Real Estate?

From the volatility of the stock market (Nortel, Enron, WorldCom, Etc.) to the low slow and safe bet on Canada Savings Bonds, T-Bills, GIC’s, etc., where can you maximize your return on investment?

Warren Buffett – Investing in U.S. Real Estate

Maximum growth and security have always been at the opposite ends of the investment scale, unless you consider Real Estate. In today’s market, with so many different places to put your money, why does Real Estate still stand out as the single most effective way to generate a healthy return on your investment? There are four main reasons why more people in today’s market make their fortunes in Real Estate compared to any other type of investment:

1) Positive Cash Flow

Generally speaking, there are two ways to get positive cash flow from a rental property. One way is when the capitalization rate exceeds the annual loan constant where the loan-to-value ratio is normal (70 to 80%) and the other is when the loan-to-value ratio is abnormally low (60% or lower). The precise formula is that your loan-to-value ratio multiplied by your annual constant must be lower than your cap rate to get positive cash flow.

2) Leverage

Real estate is one of the only investments where the bank based on good credit will out up 75% of the money needed to close the property. This leaves a remaining balance of 25% of the balance to come up with on closing. In essence, the bank is matching each of your dollars 3:1. If the bank is that confident about real estate investing long-term, you should take a closer look as to why real estate ownership is one of the safest investment opportunities to explore.

3) Appreciation

Appreciation is the increased value you have gained from the time you have purchased the property. An example would be you purchase the property for $200,000 three years ago and today its worth $250,000. Your appreciation would be $50,000. Real estate in recent years has been growing at an appreciation rate of approximately 5% annually.

4) Principal Reduction

Principal reduction is the reduced mortgage balance from the time you have purchased the property. Example your closing was $150,000 and three years later your mortgage your mortgage balance is $145,000. Your principal reduction is $10,000. Mortgages balances typically reduce by 2% annually which is further profit that investors often forget to calculate in their overall ROI.