Ever thought why a bank would lend you mortgage money to buy a house without security?
Let me rephrase it.
Have you ever thought why a bank would lend you money (as a home-buyer) to buy or invest in your own house holding that same house as a security for their money?
Remember, they are not demanding any other personal security from you. Surprisingly enough, they are willing to lend you more than 5 times your investment (if, 20% down payment) at the lowest interest rate.
What is the reason?
Do you think a similar kind of borrowing is possible if you want to buy or invest in stocks or commodities? or Gold? or Collectible?
“Crazy!”, a banker would say if you go and ask.
Here is their reason.
Your house, a piece of land plus construction, is good enough security for the bank to lend you money without any other security. Sure, your bank would like to know a bit of your financial behavioural history from your credit score. But that’s about it. Nothing else for the security.
All over the world, in every corner of the world, lenders lend money to individuals every day to buy real estate at a very easy financing condition compared to other investments.
Isn’t this compelling reason to think real estate is a good investment?
Well, in this blog post, we’re going to discuss all those reasons that make a real estate a good investment.
Let’s Think Generally about Real Estate Investment
As you can see the graph shows long-term real estate prices.
The characteristic of real estate to grow in value over time was the biggest motivator for me when I was an aspiring investor. When you are new, you are scared of unknowns and tend to give more weightage to the risk than earning. I used to think real estate is the safest investment and prices never go down.
Later on, I came to know my belief was true with some caveat. I was right in thinking real estate is a good investment in a longer term. But if I buy today and want to sell after just a few months, there is a possibility I may make some losses.
But then I thought that’s a good way to hedge yourself from possible losses.
Make real estate investment for longer terms.
Which is what I have been doing and don’t have any regrets.
I wholeheartedly believe real estate is a good investment perfectly suited for the individual or small investor.
And I am going to make multiple arguments in this blog post.
1 — Make an Investment and Live Your Dream
Home is a tangible asset. You see it, feel it and can reside in it. It creates a sense of belonging and becomes the mean to live a happy life with your family. You live your dreams in your home!
Does it not make a sense to buy a home and watch its value grow while you live your dreams?
What if you don’t buy a home. You’ll have to provide shelter for your family anyways. What is your option? You’ll probably rent.
Buying a house would serve both the purposes. It’ll provide shelter to you and your family and additionally, it may bring wealth to you in future in terms of value appreciation.
2 — Can Invest in 20-times Larger Asset than Your Investment
As a first-time home buyer, you can buy 20 times bigger property than your investment. In other words, with 5% down payment, you can buy a home that values 100%.
From a sole investment point of view, there is no other option available to you where you can do something similar. Can you invest in gold or art piece similarly?
For an investment property (not as a first-time home buyer), where you have to come up with a minimum of 20% down payment, it still is a great deal.
3 — Residential Mortgage Interest is Dirt Cheap, Always
As mentioned in the beginning, most of the lenders consider real estate as a safe and secure asset.
For the same reason, the residential mortgage interest rate is always cheap compared to the other borrowing rates at the same time.
Even the commercial real estate mortgage rates are cheaper than any other business borrowings.
4— It’s Safe Because It’s a Part-time Opportunity
Real estate investing can be operated as a part-time business opportunity in the beginning.
You buy a single rental property which can be a single family home or a small rental property of 2–4 units. This kind of small properties allows you to work as a part-time landlord (as against any new business where you’d require to work full time).
You don’t have to leave your regular 9–5 job.
This creates a huge safety net for you.
Because you are still working your regular job, you shield your family from the disruption of regular monthly income that may come your way while you are establishing your investment business. You protect yourself from the uncertainty of the business at the same time you’re doing a business!
You have an opportunity to leave your regular job in future when you get success and start generating a regular income from your investment property.
5— Easier to Learn, and Keep Control
It’s easy to buy a property, rent it out to tenants and do the landlording job. Millions of landlords in both Canada and the USA operate as an individual property investor or a small landlord.
It is very likely that you’d find someone in your life who is a small landlord. And if you ask, he or she must have started taking a cue from others. I did the same thing.
With some DIY hard work, you can be a successful landlord yourself.
You may ask how to learn all those things that make a successful landlord. Well, aren’t you doing that right at this moment reading this article? 🙂
But the larger point I am making here in the context of this blog post is this.
It’s safer to start a rental property business compared to other business because it’s easier to learn. Most investors learn while operating the business.
6— Stock or Commodity Trading — Too Many Negatives
Can you invest in stocks by yourself? How many people can learn commodity trading and investment? And how many have burnt their fingers? Well, I can say one thing, I have burnt my fingers a couple of times with stock trading.
One requires too much technical knowledge. Even if you choose to invest in mutual funds which are managed by experts, you are basically venturing into unknowns. Your knowledge remains limited to few numbers about the history of how that fund has operated.
You may have heard or read the story someone lost everything, everything in the stock market.
As against that real estate prices fluctuates but not so fast. You get a chance to position yourself. It takes a longer period to get into as well as get out of the real estate investment business. For example, the housing downturn in the USA started in mid-2007 and it took about 3–4 years for the prices to reach bottoms.
7 — Tax Benefit
Real estate investment provides you with the opportunity to save on your tax — interest deduction. In Canada, you can’t deduct the interest of your mortgage on the primary residence. But you can deduct the interest of the mortgage for an investment property.
Whereas in the United State, you can claim the deduction of mortgage interest, whether you own a primary residence or an investment property or both.
You also save on tax (in both the countries) when you sell your primary home, This is a huge deal, especially when you are retiring and if you sell home to finance your retirement!
When you save tax on your yearly income tax return, in a way, you are earning, which would not have been possible without real estate investment.
In my opinion, this is another point in favour of real estate investment.
8 — Stock Trading is the Greatest Distraction
Most of us have experienced this.
Investing in stocks or commodities keep you distracted all the time. Especially with the advent of smartphones, it’s so difficult to not get distracted while doing something important. It keeps you away from doing your daily work. It affects your mood, which may cause a disturbance in your regular task.
As against that there is no TV ticker that shows you your investment property value is going up or down.
Once you own an investment property with positive cash flow, you don’t care about the property value until one day when you are ready to sell.
9 — Real Estate Investment Makes You a Proud Owner
I bought 3 investment properties before I moved into one of those properties to live in it. I kept renting 2 bedroom apartment until that point. I remember the sense of pride I used to feel. It was a great feeling of being a unique investor who owns investment properties while still renting.
Even now when I go to my properties and meet with my tenants, it’s the feeling of great accomplishment. Because I can see my properties and remember the hard work I put in.
10 — You’re the Master of Your Own Destiny
The real estate investment provides you with the opportunity to make all the decisions to control your own business.
As against that when you invest in stocks or other investment instruments, you invest as a minor and non-active partner. You don’t have any control over what happens in the company in which you have invested.
11 — Govt Wants You to Invest in Real Estate
Fannie Mae helps you to buy 10 investment properties including your primary home. It’s mandated to have control over how much down payment a lender can request from you.
Both in the USA and Canada, one can buy a home with a government legislated insurance provider with about 5% down payment.
FHA insured loans are a type of federal assistance and have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford.
In Canada, Similar insurance is provided by CMHC, Genworth and Canada Guarantee.
12 — Help Your Children
When you own several properties, it’s very likely you’d like to give some, if not all the properties to your children to support them.
In most circumstances, it’s easier for you to give real estate directly to your children rather than sell, pay capital gains tax and give cash to your children.
13 — Invest in Your Own Business — Real Estate Investing Business
There is another option for you. Start your own business.
You have many numbers of option which can beat the option of real estate investing. But most of these options require you to work full time. Which mean you lose out on the concern of safety.
As I mentioned in (4) above, when you start real estate investing business by acquiring a small rental property, you don’t have to quit your full-time job. Meaning your regular monthly income will keep streaming. This condition allows you to start small and grow big, gradually working on your strengths.
At some stage, when you comfortably replace your monthly income with rental cash flow, you quit your job and become a full-time landlord.
Real Estate is Good Investment Opportunity, Grab It
It just takes one step to start the journey.
And it takes those singular steps taken in the right direction that makes a successful path.
According to data from 2015 Rental Housing Finance Survey, 22.7 million units in 16.7 properties are owned by individual investors or mom & pop landlords.
Do you want to become one of them?
Do you not want to start your journey today?
If you do, I’d suggest these articles.
- Why You Don’t Need a Million Bucks to Jump-Start Your Real Estate Investing Business Today
- How to Leverage Your Home to Become a Real Estate Magnate