Why Owning Real Estate Will Make You Rich

Sep. 27

Real estate is the best asset class for generating long-term wealth and attaining financial freedom. In fact, nearly 90% of millionaires reached this status through investing in real estate. We break down the distinct advantages that real estate has over other investment vehicles and explain why you should be investing in real estate if you want to build and grow your wealth.

What Are the 5 Advantages of Real Estate Investing?

There are 5 key advantages that real estate has over other asset classes:

Tangibility
Leverage
Tax advantages
Predictable Income
Superior inflation hedge

We dive into each in greater detail below:

Real estate is a tangible asset with a practical use. When you're buying a piece of real estate, you're buying a physical asset that provides someone with a place to live. People will always need a place to live and as such, there will always be demand for real estate. This is different than buying paper assets such as stocks and bonds which are intangible stores of value. If you invest in a company that ends up going bankrupt, your investment becomes valueless. Real estate on the other hand has a real intrinsic value created by its utility. As a result of this practical utility, real estate is a lower risk investment than paper assets.
Real estate harnesses the power of leverage. Buying a piece of real estate allows you the opportunity to pay a percentage of the asset's value as a down payment while benefitting from appreciation on the full value of the asset. Assuming you put down 20%, your original investment (the down payment) grows at rate of 5 to 1. For example, let's say you put down $120,000 on a $600,000 condo. If the value of the property increases to $720,000, you will have made $120k in equity which is a 100% return on your original investment. With paper investments such as stocks, bonds and GIC's, you only benefit from appreciation on the value of the money you invest. This means growth of your equity will be much slower, unless you get lucky and bet the farm on a penny stock that becomes the next Facebook or Amazon. Some brokerages allow clients to buy stocks on margin, however this is an extremely risky path that's best suited for experienced investors who have a high degree of knowledge about the companies and industries they're investing in.
Owning real estate creates significant tax advantages. If you're an employee and do not own a business, there are very few tax deduction opportunities available to you (especially in Canada), and high-income earners are taxed dearly. In the Province of Ontario, income over $100k is taxed at 43.41%. Income over $220k is taxed at 53.53%. Owning an investment property gives you the opportunity to write off various expenses related to operating the property including mortgage interest, property tax, utilities and insurance. These write-offs reduce your taxable income and provide some tax relief. Owning an investment property is one of the most advantageous decisions a high-income employee can make to reduce their taxable income and keep more of their hard-earned salary.
Owning real estate provides a source of predictable income. Because you know what your monthly rent for an investment property will be, you can easily calculate your monthly cash flow after all expenses associated with the property are paid. When you buy stocks, you only make an income if the companies you choose to invest in decide to pay dividends. Companies that have a history of paying dividends consistently are usually large, blue-chip companies that are unlikely to experience exponential growth, meaning it will take a very long time for your investment to grow. Companies poised for rapid growth typically don't pay dividends because they re-invest their profits back into the business to facilitate more growth.
Real estate is a better hedge against inflation than other assets. Real-estate estate is a better hedge against inflation than stocks because real estate investors benefit in all economic environments. When the economy is slow, central banks lower interest rates and print more money which drives up the prices of many asset classes in including both stocks and real estate. During periods where central banks raise interest rates to combat runaway inflation and reign in the economy, although the prices of both real estate and stocks typically fall, rents do the opposite and increase in these environments because reduced demand for buying homes heats up the rental market. This gives landlords the ability to increase their cash flow by raising rents, compensating for rising costs.
Stocks can be a good hedge against inflation if the companies you're invested can raise prices to compensate for increased costs. The risk here is that with big publicly traded companies there is a lot more complexity at play. If the companies you're invested in are inept at managing costs, they will remain unprofitable despite raising their prices. There is only so much they can raise their costs before customers will begin search for substitute products.