Investing in REal Estate? Top 3 reasons to buy now.
Top 3 reasons to buy NOW
Written by Paul Kondakos,
One of the most common catch phrases, veteran investor Paul Kondakos hears from Canadians reluctance to invest in real estate is “It’s not a good time.” Ah, but it is, he writes in this Top 3 list of reasons to commit.
That catch phrase is a very vague statement that can be interpreted to mean either (a) it’s not a good time for me personally to invest or (b) it’s not a good time to invest in the real estate market.
Granted that there may be circumstances thatpreclude certain individuals from investing in real estate for any number of reasons, but for the rest of you out there, “it’s not a good time” is a statement that can end up costing you tens of thousands to hundreds of thousands of dollars in potential real estate gains in the long term.
In fact, I believe “it’s always a good time” to invest in real estate (and let me be clear that I am talking about investing in cash-flowing real estate and not talking about speculating in real estate hoping for future appreciation).
When it comes to real estate investing, time is your biggest ally if you are invested and your greatest enemy if you are not. The phrase “Time is money” has never been truer when you apply it to real estate investing. Time facilitates the three most important pillars of real estate investing:
1. Mortgage pay down
Most individuals use leverage (eg. a mortgage) to purchase an investment property which makes it such an appealing investment. For every mortgage payment you make a certain portion goes towards interest, but more importantly, a certain portion goes towards principal and contributes towards building your equity in the property. I like to think of it as “forced savings” which may sound a little paternalistic in nature, but for most of us it’s a good thing.
The amortization period is typically between 20 to 25 years which means that after that timeframe you will own a free and clear property. As many like to think of their real estate investments as a retirement fund, given that you derive the greatest benefit of mortgage pay down the longer you own the property, investing NOW becomes all that much more compelling if you are counting on it for your retirement.
BONUS: After several years of equity build up, you have the option to re-finance or put a Line of Credit on the property and take money out. Psychologically knowing you have this type of security in an emergency is immense.
2. Cash Flow
As stated from the outset, investing in real estate means buying a property that provides monthly cash flow. The formula is relatively simple; Gross Income – Expenses – Mortgage Payment = Cash Flow. The beauty of real estate investing is that the cash flow is there from Day 1 (if it’s not, then you are speculating and not investing). I don’t need to tell you the benefit of having extra income coming in every month.
BONUS: For those who are sick and tired of their jobs and looking for a career change, once you have accumulated enough cash-flowing real estate, you can focus on managing your portfolio full time and enjoy the independence and flexibility that comes along with it.
I have intentially put down appreciation down as the last of the three benefits. As I stated above, investing in real estate strictly for appreciation can be a huge gamble. I know people that lost everything because they gambled on the real estate boom in the late 80s and lost in a big way. On the other hand, the potential benefit of appreciation coupled with steady mortgage pay down and consistent flow is a big winner. Typically appreciation is calculated at 1-2% annually. So very conservatively speaking, by the time your mortgage is paid off, the property will have appreciated in the range of 25-50%. It’s more likely that you will see appreciation in the range of 100%+, but I like to be conservative.
BONUS: Appreciation can be like a lottery ticket. Over time some properties can become extremely valuable based on their geographic location and return 100%, 500% and even over 1000% depending on how desirable that location has become (eg. King Street West in Toronto or pretty much anywhere in Vancouver)
If you have every seriously considered investing in real estate, every day that slips by is costing you money. As such, since you can’t start investing in real estate yesterday, you need to start taking steps TODAY towards making your first income property investment.
Paul Kondakos is a seasoned property investor and his RealtyHub.ca helps others get a leg up, or two, in real estate