Solid reasons for investing in real estate
If you invest in the stock market, which includes an assortment of equities,
bonds, mutual funds and options, you are in for a rocky ride. 2002
will record the third straight year of losses for North America’s
stock market indices. Many financial advisors suggest that if investors
can not stomach the rapid rises and falls of a stock, they might want
to consider investing elsewhere.
Stocks are not for the faint at heart. It takes a great deal of stamina
to survive the roller-coaster ups and downs of an investment that is heavily
dependent upon economics.
What about real estate? Has it done better than the stock market? Let us
take a look at Bill and Marsha, who each have received a $10,000 inheritance.
They are not sure where to invest their proceeds.
Conservative Bill invests his $10,000 in the stock market. With interest
in the Internet still growing, he puts it into a S&P 500 index fund.
A renter, and inexperienced in the stock market, Marsha uses her $10,000
as a down payment on an $80,000 condominium. Fast forward – 12 years.
Who did better on their investment?
Since 1990, the S&P 500 more than tripled. From his initial investment
of $10,000, Bill made about $22,000, pre-tax. During the same period,
the value of the S&P 500 quadrupled, so Bill's gain was roughly $30,000,
Marsha – reaping the benefits of home ownership
What about Marsha? During the same period, home values increased roughly
4 percent per year nationally. At that rate, Marsha’s $80,000 condominium
is now worth about $126,000. If she sold it, her profit would be about
On average, most Canadians invest and earn more in their homes than they
invest and earn from their savings accounts, stocks, bonds and other investments.
Gordon Pape, recognized Canadian author and financial advisor, suggests
that home equity remains a cornerstone of most families’ wealth.
Real estate is a solid, familiar investment
In addition, there are several other solid reasons for investing in real
Forced savings. Contributing towards a
mortgage automatically forces a family to save. Rather than paying rent,
these monthly payments contribute to future security.
Appreciation. By nature of the demand and
supply, home prices rise. According to the Edmonton Real Estate Board,
a home purchased in January 1997 for $123,530 now sells for $167,000.
Tax-free profits. When your home is your
principal residence, and you sell it, you will not pay tax on any of the
profits. This is one of the last and greatest advantages for building
wealth left in Canada.
Equity build-up. Your home will naturally
rise in price, according to the market. In addition, you will be contributing
to the reduction of your mortgage. The difference between what is outstanding
on your mortgage and what your home is valued at, is your earned equity.
Your equity is a valuable commodity that can be used to obtain additional
financing, obtain a second mortgage, or move-up to a larger home.
Real estate has long been recognized as an inflation-resistant investment,
providing homeowners with a tangible incentive to save. Buying your own
home, or investing in one, is widely accepted as one of the soundest financial
commitments you can make.