Real estate is the ultimate investment – nothing else provides the same kind of advantages.
This classic alternative asset class has always been an essential component in any well-diversified, prudent allocation plan – helping reduce volatility and enhance returns through both income and capital-appreciation potential. Real estate is a physical asset that cannot be traded by a click of a button by an online brokerage. You can physically walk the grounds of the property, and inspect the building. As such, it’s not subject to the volatility of other investments like stocks, where change can happen fast.
Real estate is different. While it still has its ups and downs, for the most part real estate takes a more tortoise like approach: slow and steady wins the race. By paying attention, and knowing what to look for, we can see the trends that lead to changes in the market, well before they happen. This allows us to formulate an investment plan on how to change operations or to divest the asset. This in turn maximizes our return on investment or cash-on-cash return.all completed funds are included and no omissions have been made due to modest returns.
|A big advantage real estate has over other investments, is that it can produce positive cash flow on a monthly basis. Positive cash flow is derived from the revenue collected in the form of rent and ancillary income minus expenditures required to pay for and operate the building. The cash generated by a real estate investment will always be a much larger percentage cash-on-cash return than any other investment. The reason for this is leverage.|
|Leverage is the ultimate power of investing, and the fact is that there is no investment where the application of this tool is more powerful than real estate. In real estate the leverage is based on the asset itself, and even the notoriously conservative banks will loan up to 75 percent and sometimes higher of the total asset value. Banks are comfortable lending large sums of money for the purchase of real estate because they know it is one of the safest and most profitable investments available. Also when you leverage an investment, you reap the benefits of appreciation on the total asset value, with a relatively smaller amount of initial equity.|
|Market appreciation is the gradual inflation that increases real estate values over time. Over the past 45 years Canadian commercial real estate values have increased by 7% per year on average. Because the purchasing power of money drops over time, investing in an appreciating asset is a classic strategy to protect and grow your capital.
Many people feel that the common sense thing to do is to take your money and put it into a savings bond or bank account that yields a risk free return. The main argument for this type of investing is that it is “safer” than real estate or other types of investments. The problem with this strategy is that you do not make any money, due to inflation.
Inflation is the price we pay for goods measured against a standard of ability to purchase those goods. The long term average of inflation has been nearly 3.5 percent since 1913, the year it began being tracked. That means that putting your money into a bank investment or account that yields only 2 to 3 percent, earns you no purchasing power in the future. You are actually losing wealth because inflation is higher than your returns. The gain in interest is wiped out by the rising cost of living. You are not becoming wealthier; you are becoming poorer because the cost of goods is growing faster than the value of your investment.
The beauty of real estate is that it is a tangible asset. Meaning it will generally rise either at the rate of inflation or higher. Historically real estate has risen at 5 percent per year – a full 2 to 3 percent higher than inflation. And that is just appreciation. That does not take into account the cash flow generated, nor the tax advantages such as depreciation, refinance, and tax deductible mortgage interest.
|Depreciation is an income tax deduction that allows a taxpayer to recover the cost of wear and tear, deterioration, or obsolescence on an annual basis. For real estate, it is a non-operational expense that can be used to your advantage come tax time, as it allows us to shelter income on a tax-deferred basis.|
|Another advantage of real estate over other investments is the ability to withdraw cash through a refinance of the property. This, too, results in a tax shelter deferral benefit. When you refinance a property you are restructuring your existing mortgage debt based on the added value of the property. Refinancing often presents an opportunity for investors to pull their initial investment out, while still continuing to have a vested interest in the property, creating a cash-on-cash return of infinite because the capital investment has been reduced to zero.|
|Real estate generally is a long term investment, and its benefits are best realized over the long term. It takes time for real estate to appreciate in value; however, while the property is appreciating the tenants are also paying down the mortgage. On top of this the rental income grows on a percentage annual basis often through contractual rent increases built into the legal leases. The average compounded annual increase in real estate has been 5% per year for the last 25 years. Depending on the real estate cycle at any given time, the geographic location and type of property, the percentage annual increase could be substantially higher.|
|Earned appreciation is one of the most powerful aspects of real estate. Real estate increases in value when it is refurbished, upgraded and/or repositioned. We identify potential acquisitions using investment criteria that focus on the security of cash flow, potential for capital appreciation and potential for increasing value through more efficient management and capital expenditures.|
|There are a number of ways to legally protect a real estate investment that cannot be utilized by other investments like stocks and bonds. If a stock or bond company has a bad year, and suffers losses, the individual investor is simply out of luck. Real estate is one of the few investments that can be insured and protected from damage caused for whatever reason. By having the proper insurance coverage, you are able to claim losses for the actual value of the asset before the loss, and during the loss.|