We constantly see the media try to correlate real estate investing and typical stock or equity investing, Unfortunately it’s very difficult to compare apples to apples when doing this. When you read headlines about ROI’s for the stock market and real estate, they are typically comparing your own principle residence to the stock market, rather than investing in real estate for a profit. In reality, your principle residence is a liability until you pay off your mortgage, or have someone else pay the monthly fees. Sure, the property can increase in value, but you are also paying all sorts of fees to live in it and maintain it. For those that own homes, these expenses are well worth it for the home, the lifestyle, and hopefully some appreciation, however likely not a good comparison for ROI against an investment. A rental property on the other hand, when purchased correctly does all of this for you and becomes an asset rather than a liability. Let’s look at some of the key advantages that investing in real estate gives you compared to stocks and mutual funds.
Typically, when you purchase $100,000 in stocks/mutual funds, you invest the total funds and have the value of the investment dictate your return. So if you had a 5% growth in your stock, then you made $5,000. Conversely, if you invest $100,000 in Real Estate, this typically represents $500,000 in your investment (as you need 20% down payment). Assuming the same 5% growth rate as the stock, your return would be $25,000. With leveraged funds, the Real Estate ROI is 5X greater for the same investment dollars. (Note: Going back to the 1950’s, the Canadian real estate market has grown on average 5%/annually with fewer market corrections and volatility than Stocks).
We did a study where the same amount was invested in real estate (monthly break even) and the stock market for a full 25 years, which is a typical mortgage. We found that you would need roughly a 1% annual growth rate in real estate to equal a 7% annual growth rate in stocks or mutual funds. Given risk, historical data, probabilities of crashes etc, its not difficult to see that a 1% annual growth rate in real estate is likely more probable than a 7% annual growth rate in stocks.
Let’s say you owned a great new stock, and it doubled in value. So your $100,000 investment turned into $200,000 (nice!). You could easily go to the bank and take out $100,000 and then you would be left with your original $100,00 still invested in the stock. Now look at the same comparison for Real Estate. If you owned $100,000 in Real Estate and it grew to $200,000, the great think about real estate is that typically at any time you only need to have 20% of the value invested, compared to the banks 80%. So you would be able to go to the bank, take out $80,000 and then have the full $200,000 property still appreciating for you. This is not to mention that you likely only invested $20,000 in the first place to purchase the $100,000 house. Not bad to make 4X your money back, and still control & own the full $200,000 asset for future growth (with $80,000 in your pocket to either reinvest, or take as a return). TIP: refinancing your real estate properties does not trigger a taxable event, this only happens in the year that the property is actually sold. With money getting worth less and less as time goes on, a dollar today is worth more than a dollar tomorrow.
The beauty of real estate is that you could constantly have your money working for you, rather than sitting in your asset. Take the above example for an income producing asset that simply breaks even every month. If you purchase the $100,000 home for $20,000, and it increases in value to only $125,000, you would be able to go to the bank and take out your $20,000 investment and continue having control and ownership over the asset while tenants are paying down your mortgage. So to get a full 100% payback of your stock investment, you need to make a 100% return, to make a 100% return in real estate, you only need to have a growth of 25% in your asset. Those odds sound much better, more probable and at a faster rate. The other benefit is after you pay yourself back, you still control the full higher value of your real estate property, where if you withdraw the funds from your stock portfolio, you are right back to having your initial investment.
This is not to say that stocks and mutual funds are bad investments, In fact in some cases you could even leverage stocks & mutual funds, however the amount you can leverage is far lower given that banks have a less risk tolerance for stocks vs real estate. Also, stocks are much more volatile than real estate, so if the stock goes down in value, you are likely to get a call from the bank to bring your investment ratios back up. Conversely, in real estate if there is a market correction, as long as your mortgage is still being serviced the bank will likely not call you to invest more funds.
When in the corporate world we did most of our investing in stocks and mutual funds, we didn’t do that bad either (In recent years the stock market has been doing great too). We just haven’t found a better investment option that is more secure, and can allow you to build your wealth quicker with Real Estate Investment.
Visit us at www.VenturePropertyInvestments.com and our pages on facebook or LinkedIn to learn more about how we invest in real estate to profit in both an increasing or decreasing housing market. Or contact us if you would like to learn how we are providing double digit returns for our partner’s and clients year over year.
Until Next Time,
Build Wealth. Live Life
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Martin Kuev & Chris Shebib are full time Real Estate Investors, Realtors and Wealth Coaches who have over 20 years experience in Real Estate. With multi-million-dollar real estate portfolios and a team built over the past decade, they left the corporate world to have the flexibility to spend time with family, continue their own real estate investments and help others build long-term wealth.
Both Chris & Martin are first and foremost Husbands, and Fathers. Both are actively involved with their families and each have 3 daughters keeping home life full of surprises.