Leveraging your Toronto Real Estate Investments
Why are people so excited about Real Estate as an investment? It's all about the leverage and stretching your investment dollars. How many other investments can you put as little as twenty percent of your money towards and still receive the full benefits of its increase in value?
Sure, you can use margin accounts in the stock market to leverage your money, but the risks are significantly larger than a piece of property. The banks will lend you money for your RRSP's, but you are paying interest on the money which lately offsets any potential gains the RRSP funds have been making. While it may be a form of leveraging the banks money for your use, it doesn't maximize your money's growth.
Think about this, if you bought $100,000 worth of stock and it went up 5% for the year, your $100,000 has turned into $105,000. That is fantastic; although if it went up 10% and you made $10,000, you would probably be even happier. With 10% yearly returns, your investment would double in just less than eight years. Let's compare this to some Real Estate now.
If you took this same $100,000 and used it to purchase Real Estate, you could buy two properties worth $250,000 each by putting 20% ($50,000) down on each place. You have now leveraged your $100,000 to purchase $500,000 worth of property. If it goes up only 5% over the year, your property is now worth $525,000 and your $100,000 has increased in value by 25%. With only 5% yearly increases in value, it takes slightly less than four years for your investment to double.
Yes, we have simplified both the stock market process and the Real Estate process, but you can see why the wealthy find Real Estate such an attractive place to invest. Many would argue you don't have to pay to own your stocks each month while you would have to pay your mortgage(s). This is entirely true as your tenants pay your mortgage payments for you, and if there is any extra after all your costs it goes into your pockets as cash flow.
Additionally each year as your tenants pay your mortgage, it creates more equity in your property as the mortgage amount decreases. While this only amounts to a few thousand dollars per year, each year it decreases more and more as a greater portion of the monthly payment is applied to the principal amount of the mortgage.
This type of investing is not a short term speculative approach, but part of a longer term plan. As I pointed out earlier, even with minimal increases in value the investment still grows quite rapidly. When you have home run types of years with double digit growth as we saw from 2005 to mid 2007 you can see why equity millionaires were popping up very quickly. The fortunate who lived through those years are lamenting they didn't purchase more, while many are still buying to take advantage of the slower long term outlooks for property values in certain regions.
If you can leverage Real Estate and then take advantage of having time on your side, you can help create the nest egg many people always dreamed of for their retirement years. Or in the case of some people move their retirement time frame forward by a decade or two.
If you do nothing you will have nothing.
I am not asking you to risk anything, but consider the following; as more people exit the stock market they will be investing in real estate. Tenants now number close to 30 % of the population and will increase as the stock market and financial markets continue to erode.
Real estate has always been a staple for returns in Canada averaging 3 - 5% on the total asset value.