Martin, our money man and main investment partner, emailed us last night and said simply, “I’ve pretty much lost everything.” We had been looking for a commercial property to purchase to diversify our investments. Martin was our partner again in the deal we found, assuming he was comfortable with the numbers.
At least he was planning it before the markets crashed and Martin lost his six figure down payment! Now, sitting on pennies (okay, not quite, but definitely not enough to make a down payment on a million dollar industrial property), Martin is probably wondering what so many other people do: “Is real estate a much better investment than stocks?” ?”
My answer is always a resounding “It depends” or “Diversification is better”… but if you change the question and ask me where my money is invested, 90% of my money and net worth reside in real estate (even excluding my current home).
And yes, I am young, in my early thirties! I am also a millionaire and it is all thanks to real estate. Not to say that stocks won’t make you rich, Warren Buffet is an extreme example of wealth that can be created through stocks, but I like real estate because:
- You can kick it! Real estate is tangible. You can stop by a property and tell your friends or family that you own it. You can also check how it is. That’s not so easy if you only own shares in one company. There’s nothing to show your friends and family, and most companies won’t let you come to their meetings to see how they’re doing.
- Leverage: If you have $16,000 to invest (which is what I started with 7 years ago), you can buy $16,000 worth of stocks and bonds. But, if you buy real estate, you can buy $160,000 worth of property (which is exactly what I did). While some stock investors may buy on margin (when you only put in a portion of what the stock is worth), this is a sophisticated, high-risk move that only experienced stock investors typically make. If your stock goes up in value by 5%, you have earned $800. But if your property increases by 5%, you will have earned $8,000! This is on the same investment of $16,000. This doesn’t even take into account the other ways you can make money in real estate…which brings me to my third reason why I love real estate.
- There are three ways to make money with real estate: Appreciation, which we discussed earlier, rental income and money from other people (your tenants) paying the mortgage. Even if the value of your property is declining, you are still getting rent and that rent is paying the mortgage, and the surplus after paying expenses is hitting your pocket!
- Control: As a shareholder in a company, you have no control over your investment. And you never really know what’s going on behind closed doors. I don’t need to start naming the corporate disasters of the last decade like Nortel, Enron, and WorldCom for you to really get what I’m saying! But with real estate you are in control! If your electric bills are too high, you can change your light bulbs to more efficient ones, seal your windows, and take other steps to reduce costs. If you’re losing money, you’ll know very quickly! And you can take steps to improve this situation. With stocks, what can you do if your Nike shares drop 15%? You can sell more or you can buy more… that’s all.
- Creative ways to earn money. A simple stock investor has two ways to make money from stocks… appreciation in value and dividends. I once had dividend stocks. The $30 check once a year was incredibly rewarding. Since you have control over your property and there are three different ways to make money from property, there are many creative techniques to try to make more money from your asset. Some people rent the garage detached from the house. In the right place, you could sell advertising space or simply get price reductions on work done in exchange for advertising (ever ask a painter what kind of discount you can get on your work if you put one of their signs on your lawn? ? ?), you can add vending machines or laundry facilities, you can change the density of the property (add more units…more units means more rent), or you can change the use of the property to sell it to someone who can make a best use of it (if in a commercial area, an office developer might want to pay big bucks to develop a properly zoned property). There are dozens of ways to turn a simple house into a creative money maker. The same cannot be said of stocks.
- Access to Equity without selling the asset. In the example of the $16,000 I used to buy my first investment property, I had most of that money in mutual funds and GICs. When I got paid, I had to pay taxes on the winnings! So while he actually had just under $20,000, after the government took his cut, he only had $16,000. With real estate, when you need a lot of cash, you can refinance a property or get a secured line of credit against the equity you’ve built up on the property. This means you can continue to make money from the rental income from that property AND someone else continues to pay your mortgage AND if property values are appreciating, you will continue to have an appreciating asset AND get the money you need. no taxes to pay too!
- And speaking of taxes… real estate has many tax advantages. Taxes vary by province and state, so I won’t go into all the different advantages… but suffice it to say, there are plenty of opportunities to break expenses from your income, pay off interest on your mortgages, and reduce principal. tax revenue.
With so many reasons to love real estate, I haven’t been able to get back into the markets. It doesn’t mean you should do that too! Real estate is not a very liquid investment, and once you own it, you still have work to do (unlike stocks). It’s a personal choice, but I know Martin, our money man, wishes he had never put his money in the hands of his trusted stockbroker. Even on our absolute worst real estate investment we broke even…and in less than 2 months he lost 40% of his money…and the worst thing for him is that he lost a significant portion of the down payment that he was going to use for buy commercial property. Maybe some of the stock will recover, but he fears that much of his money will be lost forever.