The benefit of having real-estate assets in your portfolio is clearly evident from the historical returns of such assets compared to other capital-gain instruments such as stocks, bonds or foreign equities.
Listed below are assumptions we have made to calculate yields in the following analysis:
Annual return for stocks: 7%
Annual appreciation of real estate: 3%
Q: If the rate of growth is less for real estate, why is it worth so much more after 25 years?
A: Real Estate is a Leveraged Investment
While a bank would never put up 75% of the cost for an investment in stocks, bonds or mutual funds, a bank will provide 75% of the cost for an investment property, or even 85% if it is CMHC insured.
Banks do not like to take risks; hence they consider a leveraged stock investment to be risky.
Well-researched, leveraged real-estate investments, on the other hand, are not considered to be as risky because they are secured by real property - hence the name "real" estate - unlike stocks which often use factors like P/E ratios or projected future earnings to arrive at some share price. Remember ENRON? It hid details about corporate debts in so called SPEs (Special Purpose Entity) to show higher profit.
The Benefits of a Leveraged Real Estate Investment
An investment in stocks, bonds or mutual funds will buy the equivalent amount of equities. In other words, $50,000 buys $50,000 of equities;
A leveraged real-estate investment buys real estate worth many times the down payment;
A property worth $100,000 can be purchased with $25,000 down - or less if it is CMHC insured;
You benefit from growth in the property’s total value, not just the original investment, which multiplies your returns;
The principal of the mortgage is paid down by your tenant who essentially buys the investment for you.
Calculating Real-Estate Returns
Unlike a stock where the measurement of return is typically a price increase in the equity (see chart below), there are 3 factors that contribute to the overall return in a real-estate investment. They are:
Property Appreciation (the green area).
Principal Reduction of Mortgage (the blue area) which adds to the equity, but is paid by the tenant in the form of rent.
Positive Cash flow (not included) - typically very substantial in well-selected real-estate investments
In a Real-Estate Investment:
Your tenant or tenants pay down the mortgage, which increases your return and essentially buys the investment for you.
Each time your mortgage is reduced, your investment return increases.
There is usually a small amount of money remaining each month, even after mortgage and other expenses are covered. This small amount will eventually grow larger with every passing month.
This money also contributes to your overall return.
Even though you've only put up a portion of the cost of the entire investment, you benefit from growth in the total value of the property.
Income Streams from Real Estate
Once the principal on your investment is paid off, and even well before it is paid off in its entirety, the monthly rental payments from your tenant become monthly income for you.
Rent generally doubles in Canada every 15 years.
Rental income is a great way to hedge against inflation as it increases with inflation, and in most cases at a quicker pace.
Owning 5 or 6 properties or, even better, owning a share in InvestPlus Properties investments, can generate a substantial monthly income that will continue to increase with every passing year.
The property is managed for you - there are no property management hassles…a major reason why many people shy away from real-estate investments. At InvestPlus Properties, we make it easy for you!
