Real Estate as Investment
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Speculation vs. Investment
Are you a speculator or an investor? A speculator makes a guess at
what an investment opportunity will provide in the future where an
investor makes a decision based on knowledge and data on a good
solid investment. Speculation would involve purchasing an asset
that must go up in value in order to make money. Examples would be
purchasing gold, most mutual funds, single family homes, condos,
diamonds, etc. Speculators may make some high returns in a short
time but can lose money if forced to sell in a down market.
Investing would involve purchasing an asset with income so that
even in a level or declining market you can make money with it as
well as build equity. Investors are not affected by market
fluctuations as they have properties supported by revenue and a
broader time outlook. This is why real estate investing is such a
sound way to make money and build wealth in today's uncertain
economic times.
Positive Cash-flow Real Estate
The benefits of cash-flow real estate are numerous and it is
because of this that we most often invest in opportunities that
allow us to draw a rental income. With positive cash-flow real
estate your tenants essentially buy your investment for you over
time. Note that positive cash-flow is achieved when more money
flows in than flows out. This is equated when: Rent - Vacancies -
Operating Expenses (property taxes, management fees, repair,
insurance, mortgage interest, etc.) is positive. Even in a
horizontal or waning market you still have a positive cash-flow
that continues to benefit your investment.
Leverage
One of the greatest benefits of real estate investing is leverage,
which allows for more readily available financing to increase your
real estate investment portfolio. As capital is borrowed to
purchase other properties, wealth is considerably magnified versus
a non-leveraged investment. Real estate is a tangible and concrete
asset unlike other investments and even the most conservative of
banks lend large sums of money for the purchase of real estate.
They know it is one of the safest and most profitable investments
available, and we do too.
Appreciation over
Time
As your mortgage is paid down by your tenants, the property value
increases over time. Through regular mortgage payments the property
value appreciates resulting in increased equity and wealth. Even
when coupled with a more conservative growth rate such as 3-4% over
the next 10 years, an investment property with rental income still
appreciates on a much higher level than most stocks, mutual funds,
and other investments.
Tax Benefits
There are several tax benefits to real estate investing. The taxes
owing on the appreciated value of the property can be deferred
until the property is sold. Even once you sell and generate a
capital gain, 50% of the capital gain is taxed at the marginal rate
while the other 50% is tax free. On many investment vehicles this
benefit can pay off substantially. You can also deduct your rental
income by using the Capital Coast Allowance (CCA) or depreciation
rate. As your property appreciates in value, the building's
physical wear and tear can be deducted against any income you earn.
Lastly, finance and operating costs such as property management
fees, mortgage interest, repair and maintenance, and property taxes
can all be claimed as deductions from your income.
Investment
Legacy
As your cash-flow increases through incremental decreases in
mortgage financing over time, a growing income is created that is
an asset to both you and your family. Through re-financing options
real estate investing offers a renewable source of capital which is
a very valuable addition to RRSP revenue in your retirement years.
This allows you to construct an investment real estate legacy that
will benefit your children and grandchildren.