IRL: Why Invest in Real Estate?

By Neville Joanes

You’ve played Monopoly before—buying and trading buildings, developing properties, and staying out of jail. But have you ever wondered what it would be like in real life? The fun part, not catching your siblings cheating and losing all the game pieces. Imagine owning an apartment building on the Boardwalk or a retail store on Illinois Avenue. Today, technological advances and regulation changes have made those kinds of investments more accessible.
But how is investing in real estate better than other financial decisions? Let’s take a closer look at some benefits:

1. Passive income
Passive income is regular income from your investments that isn’t earned from your employment or gig work. With real estate investing, this is the rental income received after covering operating expenses. Creating a passive income stream that can replace your annual salary or cover your regular expenses is powerful.

2. Tangible assets
You own a physical building. Unlike a stock or bond—which represents ownership in or a loan to a corporation—real estate is something tangible you are investing in. Its value is determined by location, building condition, and income generated.

3. Capital appreciation
Buildings and land usually appreciate, which means they increase in value over time. Ultimately, your investment will be worth more than you paid for it. For this reason, real estate has historically been viewed as a hedge against inflation. In addition, real estate has appreciated 14% per year in the last 10 years, returning twice as much as the S&P/TSX.”1 When combining that with growing immigration, development, and economic advances, you can expect real estate to have incremental growth.

4. Low correlation
Real estate has a low correlation with stocks and bonds. Changing market conditions such as interest rates or unexpected inflation affect real estate differently than the market. This is a key component to having a diversified portfolio of investments, as it allows your portfolio to maintain resilience through different market cycles.

5. Low volatility
Real estate is a less volatile investment than stocks. In the last 10 years, real estate has outperformed the stock market with 1/5 of the volatility.2 It is true that the higher the volatility, the riskier the investment tends to be. In other words, volatility = risk. Adding real estate to an investment portfolio typically enhances stability in addition to increasing returns.

6. Impact of leverage
One of the most significant advantages of investing in real estate is the ability to use leverage. Leverage is using borrowed funds, or sometimes debt, to increase a potential return of an investment or project. In real estate, the most common way to leverage your investment is through a mortgage. Leverage works to your advantage when real estate values rise, but it can also lead to losses if values decline. Investment risks can be controlled by limiting the amount of mortgage taken, making sound investment decisions, and considering mortgage payments, vacancies, and a tough economy.

Now that you understand the power of real estate investing, are you ready to buy your first investment property? To get started on your real estate journey, visit us at Willow.ca.

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Footnotes:
1 Jun 30, 2011-Jun 30 2021
Real Estate is represented by Stock Market is represented by S&P/TSX Composite Total Return Index 7.4% with volatility of 11.8%

2 Jun 30, 2011-Jun 30 2021
Real Estate is represented by Teranet National Bank House Price Index 14.3% with volatility of 2.5%


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