Expert Article | Why Everyone Should Own Investment Real Estate
I’m sure many of you have heard that a large number of the world’s wealthiest people got there through investing in Real Estate. Does that mean only wealthy people can successfully invest in real estate? Can the average Canadian successfully build a real estate portfolio to secure their long term wealth? The answer is absolute yes!
Most of us, as small business owners and entrepreneurs do not have any kind of pension plan. We have to rely on our own retirement planning efforts to make sure we and our families are taken care of in our retirement years. The most common way to do this is to go to your bank or financial planner and open an RRSP. Most RRSP’s will contain one or more of the following – GIC’s, Savings Bonds, Mutual Funds and Stocks. The average person’s RRSP will return around 6-8% annually. The average property in the Greater Vancouver area increases an average of 4-5% per year.
So why would you ever invest in Real Estate?
A carefully researched and well-managed property will actually return on average, between 20-25%. Here is how. With real estate, you make money in 3 ways. I like to look at it like a 3-course meal. First, you have cash flow (the appetizer). A well-selected property will always bring in enough rent to pay all expenses and still put money in your pocket each month. Never buy a property where the cash flow is negative. Typically the cash flow will return 1-3% per year. Secondly, you have the tenant paying down the mortgage every month (the main course). If you choose to do nothing else with the property for the next 30 years your tenant will pay your mortgage off for you. This typically returns 6-8% per year. Finally, you have the appreciation (the dessert).
To be conservative, I calculate a 3% increase in the value of the property each year. Now here is the fun part, if the value of the property goes up 3%, the return on your money is actually 15%. This is because of the power of leverage. When purchasing a piece of property you are only putting in 20% of the purchase price and the Bank will be putting in the other 80%. You as the Real Estate Investor are getting the benefit of all 100% of those dollars. There is no other investment that I know of where the bank will finance 80% of it.
There are a few things you want to take into advisement when purchasing an investment property.
Be aware of what is happening in the city you choose to buy-in. Make sure the economy is stable and people have jobs. Always analyze the property for positive cash flow and if cash flow is negative then move on to the next property. Have a plan and a vision. Where do you want to be in the next 10, 20, 30 years? How many properties do you need to own to get there? By starting with your end goal in mind it will make it much smoother and easier to build a portfolio. Finally, surround yourself with an Investment Focused team that understands investment real estate. This team needs to include a Realtor, a Mortgage Broker, a Lawyer and an Accountant.
Take your time hiring these people as you want to make sure they know what they are doing and are able to guide you and advise you. I would even suggest asking professionals if they are active investors. Real estate requires some work and some research but if done properly it can set you up for long term generational wealth and a legacy that can be passed on to the next generation in your family.
Mark George, Kelly Fry Team – Keller Williams Elite Realty