Why You Should Invest In Real Estate In 2020
What you invest in depends on your risk profile. Because there’s a higher learning curve, real estate investing is not the easiest option for beginners. When you take the step into real estate investing, our clients think it’s a satisfying and lucrative investment strategy. So, is investing in real estate still worth it in 2020? Here are the top reasons why you should include real estate in your investment portfolio.
If a company has growth potential, you may see great returns on stocks if you are willing to take the risk. A company’s performance is heavily dependant on the competence of the company’s management. In fact, there’s no guarantee of future returns on your investment in stocks, and you can lose all your money investing in the wrong stock. Bonds are lower risk compared to stocks because you are loaning money to a company or a government. Company bonds are still dependant on the competence of the management, but you get steady interest payments. Government bonds are less risky, but it also pays the lowest interest rates.
Real estate is a physical asset. Land holds it value and its price increases over time because there’s a limited supply. Because its performance isn’t completely dependant on its managers, real estate investments are a lower risk investment compared to stocks and bonds.
Higher risk tends to generate higher returns. So, you may see individual stocks performing very well. As a basket of stocks, the risk is reduced and the returns are reduced. In fact, the S&P index showed an annual return of 5.9% over the past 20 years. Because bonds have lower risk, they have lower returns than stocks.
Historically, we see steady appreciation of 7.4% per year in the Toronto detached house market over the past 20 years. This is due to a combination of low supply and high demand.
On the supply side, there’s a limited supply of land for houses and city council isn’t approving new condo builds quickly enough to meet the demand. There’s a huge influx of people coming into Toronto. Canada as a whole attracts people from other countries due to our great social benefits, such as healthcare, safety, and education system. Toronto is the financial hub of Canada – we’ve got the steady and attractive job opportunities. So, this brings in people from other parts of the country as well as outside the country.
On top of this, you also get steady cash flows from rental income. So, the combination of higher returns from cash flows and appreciation makes real estate a better risk-adjusted investment.
Less Market Fluctuations
Stocks and bonds are generally correlated to each other. When bond prices fall, stocks eventually follow and move lower as well.
On the other hand, real estate investments are more resilient to changes in the economy. If the economy takes a downturn, people still need a place to stay. Instead of buying a property, more people may start to rent. In turn, higher demand in rentals will bring up your cash flows. If the economy does well, property prices increase and you will see higher appreciation on your real estate. Cash flows and appreciation in real estate investing offer a natural hedge against each other. Because they don’t move in line with the economy, they also provide balance to your stock and bond portfolio.
If you want to grow your investments at a quicker rate, you can choose to borrow money to fund your investments. Stocks are higher risk, so your borrowing rates and margin requirements tend to be higher.
On the contrary, real estate is lower risk because it is a physical asset that holds its value. So, banks can loan you up to 95% of your property’s value and you usually get better interest rates on mortgages compared to margin trading.
Instead of trusting a company or government to manage your investment, real estate investments can be managed by you. You can act on opportunities for improvement so you can control your returns. One great way to increase your real estate investment returns is by upgrading your property. If you want to get more ideas on how you can boost your real estate investing returns, take a look at this post.
Risks Of Investing In Real Estate
Real estate investments can offer great returns, but it is not for everyone. Here are some factors you need to think about before you get started:
- Larger Barrier To Entry: Unlike stocks and bonds that have no minimum order quantity, buying a property requires a larger investment. If you’re getting a mortgage, you will need good credit and sufficient income to get approvals. With us on your team, we will analyze your situation and point you to the right lenders who can get you the rates and terms.
- Longer Investment Period: You can make money quickly in the stock market since there are higher daily price fluctuations and transactions can easily be done by yourself on the internet. Because there is less volatility in real estate and the transaction involves more time and people, real estate is less liquid and a longer term investment. When you work with us, we give you a seamless and efficient buying and selling process, while offering you with most value.
- High Learning Curve: Unlike stocks and bonds, there are no reporting metrics on individual real estate investments. So, you need to understand how to make money with real estate investments in order to find deals and generate great returns. After that, you need to learn how to to renovate it, lease it out, and manage it. When you work with our team, we are your coach. We’ll teach you the basics of real estate investing, how to start investing, and how to grow your real estate investing portfolio.
- Requires Work: Since you have control of your investment, real estate investing takes work. It takes time to look for good opportunities, do the upgrades, lease it out, manage the tenants, and manage the property. With our team, we’ll guide you to get your first property up and running. If you need more help, our leasing and property management teams can help out.
How We Can Help
Depending on your personal risk profile, your choice of investments may vary. As an investor, you probably don’t want to “put all your eggs in one basket” to reduce your risk. Real estate doesn’t move in line with stocks and bonds, so including real estate in your investment portfolio can be a great way to diversify your portfolio.
Real estate can seem scary, but our experienced team is here to help you out. We provide expert real estate investing insights to get you started, and will teach and guide you to get your investment property up and running. If you don’t have time to manage your property, our leasing team and property management team are ready to do the heavy lifting. As your real estate portfolio grows, we’ll be right there to help you overcome financial challenges as your portfolio grows.