Here are 10 reasons why we think it is much better to invest in real estate than in any other investment vehicles — they are the reasons WE invest in real estate.
- In Real Estate, we can insure our property for its full replacement value, against loss. We cannot insure paper assets against any type of loss.
- In Real Estate, we can put $10,000 as a down payment to buy a $100,000 property and get $90,000 from the bank. We now own $100,000 of assets. If we put $10,000 into paper assets, we get only $10,000’s worth of asset.
- If the value of your $100,000 property increases by 5% in one year (which is below average in Ottawa where we live and invest), we are $5,000 richer. If our $10,000 paper asset increases by 5% in a year, we’re only $500 richer.
- The bank will loan us a lot of money to buy property—millions if we want to buy an apartment building or a commercial building. That’s using OPM—Other People’s Money—at its best! We can also go to mortgage brokers, hard-money lenders, etc. The bank will NOT loan us a penny to invest in paper assets. And forget mortgage brokers and hard-money lenders. We have to use OUR own money to buy paper assets.
- Certain types of properties will generate cash flow—called passive income—which is taxed at a much lower percentage than earned income. We can’t get cash flow from paper assets (unless a mutual funds pays monthly dividends). And that is a capital gain which is taxed at a higher %.
- Though we have no control over the real estate market as a whole, we have control over the “value” of our property—which we can increase by doing minor improvements, full rehab, keeping full occupancy, changing the vocation of the property. We have NO control over the stock market or over the management of our paper investment; there’s nothing we could do to increase the value of our paper assets.
- There are all types of depreciation and expenses we can legally use to reduce the income from our real estate investments. For example, when we travel to other provinces or other countries to look for property to invest in, those travel expenses are a legitimate tax deduction. Try to do that with paper assets!
- Real estate is REAL. We can drive by it and SEE our investment. We can live in it. We can pain it. We can add an extension to it or plant a tree in front of it or add a patio behind it. Paper assets are just that: a piece of paper.
- We can form partnerships with many other investors—family, friends, or total strangers—and together we can buy big properties that will yield remarkable ROI. Just imagine going to family and friends and say “Hey, let’s pool our $50,000 together so we can buy a whole bunch of shares of Nortel or some petroleum company…”
- But most of all, we invest in real estate because it provides a roof (or a hundred) over people’s head. And it allows us to give people with past credit problems another chance to own a home or live in a safe and sound apartment or condo. It’s a great feeling, a feeling we can’t imagine getting from calling a broker and buying a bunch of stocks.
There are more reasons why we prefer to invest in real estate ourselves, but those are the 10 main ones.
By Daniel G. St-Jean & Laurel R. Simmons