Who is the wealthiest person you know? Almost without a doubt they will tell you that they have substantial real estate holdings inside their portfolio. I am here to tell you why.
But first, for context, you might be asking yourself “why now”? Well, because there is an opportunity in the marketplace that I have never seen in my 20+ year career and will likely never see again.
Over the last two years, your home’s value increased on average 40% in value. Now the market has peaked and we are having a bit of a soft landing due to the Feds raising the overnight rate 4 times already this year.
How is this an opportunity?
First, we have a whole cohort of first-time buyers with solid incomes and the best of intentions that simply cannot break into this market. They are your new tenants. The average home in Ottawa purchased today would require a household income of $137,050 assuming you had 20% down. A six-figure income is now needed to buy the average home in Ottawa. As Julia would say, Holy Guacamole!
Secondly, the new found equity in your current home may be your ticket to getting into investment real estate. The banks will lend you up to 80% of your current market value. Voila, you have a down payment for your first investment property!
There are so many reasons why real estate is a wealth creator, but let’s start with this. It is a leveraged investment. You may be saying to yourself “Sean what the heck are you talking about?”
Let’s use a simple rounded number as an example: say you buy a $1 million property with 20% down, in other words you invest $200,000 to buy a $1 million investment, but which number do you earn your return on? You earn a rate of return on the value of the building, not on the value of your down payment. Your tenants pay the mortgage and expenses, and you get rich slowly!
Ottawa has an average 5.6% rate of return over the past 50 years. With 20% down, you have a 5 times multiplier on the market rate of return on your initial investment. Your down payment has earned a 28% rate of return over the last 50 years! Do you know anyone in the stock market that can say the same?
Now, admittedly I am oversimplifying a bit. To determine your realized rate of return you have to subtract the interest cost on the mortgage you are carrying and utilities, taxes, and maintenance. Individual results will vary, but a solid winner in any case.
Reason number two that real estate is a winner: Real estate values in Ottawa rarely go down on a year-over-year basis, and when they do the losses are quite small. In fact, Ottawa has recorded a contraction in average sale price only 3 times in the last 50 years.* The biggest one-year drop was 2.9%. The second biggest was 1.9%, and the third was 0.4%.
American business magnate, investor, and philanthropist, Warren Buffet has famously said, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” Why is this so important? It’s important because it is very difficult to recover from losses.
Let’s go back to my $1 million purchase example above. Imagine you had $1 million worth of stock and the market crashed… You probably owned Nortel stock around the 2000’s or bought Shopify at its peak recently. Your million dollars becomes $500,000 overnight. But what happens when there is a corresponding increase of 50% in the marketplace? Are you back to a million dollars? No my friends, you are not… Your million dollars crashed to 50% and when the market rebounds by 50% you are left with $750,000 and a $250,000 loss. Ouch…. Now do you see the wisdom in Warren’s words?
I am merely sharing the tip of the iceberg here and a deeper dive into your particulars would be my pleasure. We have assembled a team of professionals to help guide you through the process of starting your real estate empire one door at a time.
Reach out at your leisure and we can book a one-on-one consultation and really get “in the kitchen” on all of this.
*According to Ottawa Real Estate Board historical trends stats.