When interest rates are at historic lows as they are now, where can you find stable investments with a reasonable rate of return? Where can you find an investment that has the potential to pay a steady income or one that can generate a big impact with relatively small investment? The answer is simple – it’s real estate. Those same super-low interest rates are making it easier for new investors to get into the market right now and here are some of the reasons why they are doing it.
1. Historically Property Almost Always Increases in Value
Unlike many physical assets, real estate usually does not lose its value over time. As long as people need places to live, you can feel safe in the knowledge that property values will rise – but it may take a while. People say that real estate is a long game, and that’s generally true. The biggest gains happen when you own a piece of property for more than 10 years. So once you’ve made an investment, settle in and enjoy the slow but steady growth.
Want to see your investment pay off a little more quickly? ‘Flipping’ a home is a much quicker way to raise the property value by improving or replacing the home on it. However, flipping is a much riskier endeavour as you are dependent on short-term market conditions and vulnerable to unexpected costs in renovating and selling that eat into your bottom line. However, if you are familiar with the process, have the financial backing to support you, and have contractors you trust, flipping a home is a great way to get in and get your money out at a profit.
2. Real Estate Can Pay for Itself
When purchasing an investment property and renting it out you’ll be generating an income to help cover monthly expenses while also paying down the principal of the mortgage debt. Typically over the long term, your mortgage will decrease while the rental rates will increase and as a result, you’ll be enjoying better monthly cash flow while also continuing to build equity while the housing market grows.
3. Real Estate Offers Diversification
In an investment portfolio consisting of cash-based investments like stocks and mutual funds, real estate is an excellent way to diversify from the volatility of financial markets. When the stock market fluctuates dramatically, real estate tends to be more stable. Many experts believe the Canadian Government works to constantly stabilize the housing market (more than with other markets) because of its functional importance to the country in terms of it providing places to live/shelter for its citizens.
4. Make More with Less by using Leverage
One of the biggest perks of investing in real estate is the ability to leverage your investment. With only a 20% down payment (sometimes less), you can purchase an investment property. As it increases in value and your equity grows, you can use that value as collateral for future investments. *HINT: Work with a mortgage broker that will not only help you qualify for your first investment property, but also will strategize with you to build and qualify for multiple investment properties over time.
Investment Properties Need Work
Buying an investment property for investment is not without its downsides. For instance, it takes more work to buy a house than simply making a stock transaction. You need to do your research, and depending on the property you buy and your plan to either rent it or flip it, you may have to do some physical work to get it into shape. Furthermore, real estate is not as liquid as other investments. There are transaction costs that come along with it, including land transfer taxes, realtor fees, legal fees and capital gains taxes. **HINT: Work with an accountant that is familiar with real estate investing.
Every investment has risk. Stock, bonds and mutual funds have their own pros and cons, but they may still be well-suited to your investment goals. You should work with a qualified and trusted financial planner to ensure that you have the right mix of investments to set you up for the future. If you’re thinking about investing in commercial or residential real estate, talk to a qualified mortgage professional who can give you practical advice. Call HW Advantage to talk about investing and to get a personalized plan for your first purchase or to grow your real estate portfolio. Like us on Facebook for more mortgage tips.