2 Whys: The first, Why should you invest into Real Estate??

Last Updated on 2017-03-15 by Tom

2 whys

I guess there is no need to tell everyone here that why you need to invest. Going through the economic crisis that we are still in right now, everybody has learned in a hard way that a well-informed investment is a must to secure our own financial future, or to some extent, our true freedom and destiny.

So let’s go straight to what I called “2 whys”

Why No 01, why should we invest into real estate?

There are numerous ways of investing, why should real estate? Here, I just want to share some personal experiences to demonstrate these whys to me.

First and for most, Real Estate is a low risk and rather safe investment if you know what you are doing. The low risk factor is actually prefabricated when a decent real estate investment is being well structured starting from the beginning. It is all boils down to:

v               When you buy (I just follow one single rule: Never get into multiple offers)

v               Where you buy (location, location, location, the golden rule for real estate)

v               What you buy (Emotion has to be out as it is their dream house, not yours)

v               How much cost you (a motivate seller, not a motivated buyer leads to a safe margin)

v               How much you should pay (Engineering your safe net with bottom and up line)

v               Who is your partner? (strangely enough, your renter will be the key to your success)

v               When is the time to sell (when you hear real estate three times or more in one day, sell)

Now I pretty much tell you all the secrets to be a successful real estate investor. And none of them are exciting, super-hot, breath-taking, any anything at the same line. It is actually quite the opposite: boring, patient, discipline and some guts, are few things to get there.

Secondly, Real Estate always has the position of imbalanced supply and demand in the long term, it is especially true if you understand the geometrical location versus long term economy growth. For example, Alberta has 2nd largest oil reserve in the world. There are still 98% of the inventories untapped. On the other hand, the word of desperate to describe the need on the oil resource is still nowhere close to the reality, if you realize that all of sudden, 1.5 billon of the world population wants to throw their bicycles away and jump into cars. The make the situation worse, the world is also hitting the time called oil peak, no matter we like it or not. The simple truth is that we will need a lot of people here in Alberta in a very long time to maintain this important supply to the world economy. Therefore, real estate is going to likely in demand here in the long term.

Lastly, Real Estate is the only merchandise in the world that appreciates, and combined with the leverage with bank’s money, it makes Rate of return, the ultimate goal of any investment, very attractive, even at an average year. Let me explain this through an example. Let us say, you have $50,000 money, you face two options, Option A is to buy a really nice car, worth $200,000.00, Option B is to buy a rental house at $200,000.00. And for argument sake, you get bank loan for 25 yrs amortization at 4.0% rate. Your mortgage (for car or for the house) is $790.00. For the car, you will need to pay insurance, maintenance, gas so on, so let us the average monthly additional cost is $250.00 (could be a lot more than that, just be aware). Does it make any money? Out of luck. Even worse, the moment you drive this car off the dealer parking lot, the price goes down by 20% and it depreciates down to $5000.00 by the end of the 25th yr. so your rate of return, negative for sure.

Now let’s take a look on the house. Firstly, it appreciates, which means it likely beat the inflation rate by at least 1-2%. So let us say it is 5% appreciation rate. By the end of the 25 yr term, its value should be $677,270.99 (yes, it is no brainier by the end of Y 2035, which will be the small dingy house worth, if you know everything you put on the table is increasing price by 3% at least yearly, if not more). By the end of the Year 2035, you sell this house, and paid off the mortgage, which will leave you $627K profit. Minus $120K capital tax, you have $507K left as pure profit. What is the rate of return yearly? 40.56% if you understand the leverage and realize all in all the money you put in is 50,000 at the beginning.

40% ROI after tax, with 25 year term, not even mention the cash flow you may build up through the years if you really know what you’re doing, is not a hard fact to realize why through the human history, 90% of millionaires are made from real estate. Numbers don’t lie.

In short, the low risk and safe features that built-in with the “real” real estate investment, the 2nd nature of imbalanced demand and supply that built in with real estates at certain areas, and the secret of ROI structure due to its appreciation and leverage power, give the true and solid answer to the question why you should investment into real estate, actually, yesterday. But, just like a Chinese proverb says: “the best time to plan a tree is 20 yrs ago, the second best time is today”.  

I will reveal the next why in the next post and see you soon!

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