The following are mutually exclusive but frequently inter-related reasons:
1. Attractive Return on Investment ( ROI )
The potential for an attractive return on your investment is very high in real estate, especially taking into account an increase in property capital gain and positive revenue cash flow income.
Historically, real estate has increased in value greater than inflation and many other forms of investments. Depending on the geographic location and type of property investment, the gains are frequently double-digit and sometimes triple-digit. Through the application of financial leverage, the net returns in cash flow and property appreciation can be considerable.
Example: If the investor puts 10% down and borrows 90% of “other people’s money” eg lender financing, the return on investment (ROI) is calculated on the actual amount the investor contributes of their own money. Using this formula, the ROI can be immense. For example, if an investor buys a $200,000 house for investment with 10% down payment ($20,000) and a 90% ($180,000) mortgage, and the property doubles in value ($400,000) over 5 years, the equity increase would be $200,000, or $150,000 net after capital gains tax. This would represent a 750% return over 5 years or 150% ROI annual average over the original investment of your own money of $20,000. Also, the mortgage debt would have been reduced over the 5 years, providing even more equity.
In the example above, there would be no negative debt financing required by the investor, as there would be break-even of expenses over income. However, if the investor was astute and well informed, there should be positive cash flow. This would mean that the actual average annual net ROI (after tax) of the investor would be greater than 150% annually on the original investment of $20,000. In addition, the fact that there is a positive cash flow is one factor that automatically increases the value of income-producing real estate, sometimes very substantially.
2. Tax Advantages
There are numerous types of tax advantages to investing in real estate, whether you have a principal residence or investment income property. It would be difficult to find an investment that has as many financial benefits as real estate.
Example: All the interest you would receive from a bank account, term deposit or GIC is fully taxable as income. If you are obtaining interest of 4% on your deposit (the nominal rate) on your deposit, and the inflation rate is 3%, the effective or real rate of return is 1%. If you are paying tax at a 35% rate, then effectively you are breaking even, or possibly having a negative return on your money. In practical terms, taking inflation and taxes into account, you have lost on your bank deposit investment. Equity investments in the stock market have a degree of risk, depending on the nature of the investment, of eroding the principal and having no positive return.
