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Why Invest In Real Estate?
Real estate has produced more millionaires worldwide than any other industrial investments combined! Real estate is the foundation of all security and about the only indestructible asset.
What started as a basic necessity for survival has evolved into the key to enormous wealth and financial freedom. Despite the economic rollercoaster, today's real estate market continues to offer you and your family numerous opportunities for building wealth and financial security.
Real estate investing can be a complex process - Empire makes it simple. Your lifestyle and financial goals are within reach when you partner with Empire Real Estate Investments proven investment solutions.
"Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming financially independent, for real estate is the basis of wealth." Teddy Roosevelt
Benefits of Real Estate
Real estate investing provides the highest return, the greatest value with the least amount of risk. And here's how:
The simplest definition of positive cash flow is that you collect more revenue, usually in the form of rent, than it takes to pay for and operate the property. A big advantage of real estate over other investments is that it can produce cash flow on a monthly basis. The cash generated by a real estate investment will always be a much larger percentage cash-on-cash return than any other investment. The reason for this is leverage. The beauty of cash flow is that it enables you to become financially free by creating a passive income.
This is simply the ability to buy more with less money. In real estate the leverage is based on the asset itself and financial institutions will lend money from anywhere between 65-95%, (depending on the type of real estate), of the total asset value. When you leverage an investment, you reap the benefits of the appreciation of the total asset value, while only having a small percentage of your own money in the deal and also allowing you to receive higher returns on your investment.
Example of Debt Leverage: This example assumes you have $500,000 to invest and alternative to buying a $500,000 property for all cash or a $2,500,000 property for 20% down.
All Cash
Leveraged
Purchase Price:
$500,000
$2,500,000
Down Payment:
$500,000
$500,000 (20% LTV)
Loan Amount:
$0
$2,000,000 (80% LTV)
Annual Return Before Debt Service (10%):
$50,000
$250,000
Annual Debt Service:
$0
$200,000
Annual Net Income:
$50,000
$50,000
Property Value at Loan Maturity:
$500,000
$2,500,000
In this example the investment property will be worth five times what was originally paid at loan maturity from mortgage amortization, by leveraging 80% from the bank. Other factors such as forced appreciation and inflation can further increase the value.
Example of Cash Flow Leverage: This example assumes an 80% loan at an interest rate of 7% of the original loan amount.
All Cash
Leveraged
Purchase Price:
$500,000
$500,000
Down Payment:
$500,000
$100,000 (20% LTV)
Loan Amount:
$0
$400,000 (80% LTV)
Annual Return Before Debt Service (10%):
$50,000
$50,000
Annual Debt Service:
$0
$28,000 (7% interest)
Annual Net Income:
$50,000
$22,000
Annual Return on Investment (ROI):
10%
22%
In this example your return on investment is over double the amount if 80% of the purchase price is leveraged from the bank.
Many individuals feel that the common sense thing to do is to take your money and invest it into a GIC or a bank savings account that yields 1-3% per year. The main argument for this type of investing is that it is âœsaferâ than real estate or any other type of investments. The problem is that you don't make any money. The reason for this is inflation.
Inflation is the price of goods measured against a standard of ability to purchase those goods. Example: If gas prices were to rise from $0.80/ L to $1.00/L, this would result in a 20% increase. If your annual salary isn't rising at the same increase, this means you have less purchasing power because your money doesn't buy you the same amount it used to. According to inflationdata.com, the long-term average of inflation has been nearly 3.5% since 1913. This means that investing your money into a bank savings account or GIC that yields you 1-3% earns you no purchasing power in the future. You are actually losing wealth because inflation is higher than your returns. The beauty of real estate is that it is a tangible asset-a "good", which means that it will generally rise either at the rate of inflation or much higher. In fact, some of the items that make up inflation are composed of real estate. Historically real estate has risen 5-6% per year- a full 1-2.5% higher than inflation. And that isn't taking into account the cash flow generated from a real estate investment, nor does it include any of the other tax advantages.
Tax-Free Refinance- This is the ability to withdraw cash through a refinance of the property resulting in a tax free transaction. When refinancing, you are restructuring your existing mortgage debt based on the added value of the property and pulling out the equity.
Tax Deferral Real estate profits are not taxed until you sell the property. For example, if you purchase a home for $100,000 and it appreciates to $150,000, the $50,000 gain is protected from taxes until you sell it. This allows your investment to grow tax-free year after year, further compounding its worth.
Depreciation In addition to capital growth, your real estate investment also generates revenue through rental income. You can deduct this income by using the Capital Cost Allowance (CCA), or depreciation rate. As your property appreciates in value, the building's physical wear and tear can be deducted against any income you earn. You pay no taxes on that portion of income until you sell.
Tax Deduction Finance and operating costs such as mortgage interest, property management fees, property taxes, repair and maintenance - all of these can be claimed as deductions from your income.
Capital Gains When you sell, real estate profits are treated as capital gains. This means only 50% of your capital gains are taxed, unlike interest earnings from bonds and GICs. In other words, 50% of your profits are tax-free.
Tax benefits are unique to each individual investor. We suggest you speak with an Empire Real Estate Investment executive as well as an independent accountant to identify what benefits or opportunities apply to your individual situation.
It is a little known fact RRSP funds can be used for investment properties in the form of a registered mortgage through a true, self-directed account. Interest earned through an RRSP investment remains sheltered within your RRSP account. The returns earned are then paid to the RRSP account and remain tax-deferred until such time as they are withdrawn from the account.
When it comes to capital growth, the old adage is true: location, location, location. Capital growth is never the main reason for purchasing real estate investment properties and is only a bonus; however, it is important to invest in locations where the economic fundamentals make sense to take advantage of this benefit.
The National Association of Realtors has been tracking home prices since 1968 and since then, home values have increased each year at an average rate of inflation plus one to two percentage points. The longer a property is held, the more likely an investor is to profit from resale, unless the property was purchased at below market value, in which case appreciation would be immediate. But whether instant or gradual, capital growth can create fortunes. By conducting due diligence on the location of an investment property, investors are able to reap the benefits of positive cash flow coupled with capital growth. By leveraging the bank's money on an investment property, you can also take advantage of the capital growth on the "loaned" amount and write off the interest expense from the loan as well.
Improvements can be made to an investment property to increase the overall asset value. These may include physical improvements, through renovations and upgrades or operational improvements, by maximizing revenues and minimizing expenses. Through recognizing and implementing improvements, the asset value of a property will increase, which creates the opportunity to refinance the debt on the property, pull out the equity, pay back the capital invested along with additional profit, and continue to own a positive cash-flowing real estate investment property with no money in!
Like any market, real estate goes through up and down cycles; however, unlike the volatility within the stock market, prices move much more slowly, allowing time to react to market changes. At Empire, we look for key indicators to recognize trends that lead to changes in the real estate market well before they happen. This allows us to formulate an investment plan on how to change operations to maximize ROI, or to sell.
Time is money; it's also one of the few things in life that can't be replaced once it's gone. Real estate allows you the freedom to enjoy your life while your investments are appreciating while providing you with a continuing stream of cash flow.
