A Comparison Between Real Estate Investing & Stock Market Investing

The benefits of cash-flow rental real estate assets in your portfolio are very evident from the historical returns of such assets when compared to other capital gain assets such as stocks.
Like stocks, real estate goes in cycles, and therefore you want to buy in an upswing or emerging market, in an area where people move to, where income is strong and rents are going up or at least, are steady. When house prices fall, even more people chose to rent, benefiting you, the (future) landlord.
Here are some assumptions I made to calculate the yields in the following pages: Annual return for stocks is 7% and annual appreciation of real estate is 3%. If the rate of growth is less for real estate, why is a $25,000 investment worth more after 25years?
Real Estate is a Leveraged Investment
While a bank would usually not put up 75% of the cost for an investment in stocks, bonds or mutual funds, a bank will provide 80% of the cost for an investment property, or even up to 85% if it is CMHC insured.
Banks do not like to take risks; hence they consider a leveraged stock investment to be risky.
This picture assumes a cash investment of $25,000for a $100,000 property (for example a condo) and an annual appreciation of 3%. As you can see, in 25 years the property is worth over $200,000 and is still providing monthly income! You have increased your investment 8-fold.
Even in the worst-case scenario of flat real estate, you have an asset worth 4-fold, which you own 100% and which is still providing monthly income. Even if the real estate drops 50% in value (extremely unlikely) you have doubled your money.
Well-researched leveraged real estate investments, on the other hand, are not considered to be as risky because they are secured by real property hence the name "real" estate - unlike stocks, which often use factors like P/E ratios, or projected future earnings to arrive at some share price.
Remember ENRON? They hid details about their debts in so called SPEs (Special Purpose Entity) to show higher profit. How about World Com? Martha Stewart rings a bell? Conrad Black and Hollinger International?
I like real assets with real value where real people pay real dollars every month, in every economy.

The Benefits of a Leveraged Real Estate Investment
An investment in stocks, bonds or mutual funds will buy the equivalent amount of equities. In other words, $50,000 buys $50,000 of equities, unless you buy on margin. A leveraged real estate investment buys real estate worth many times the down payment. A property worth $100,000 can be purchased with $20,000 down payment - or less if it is CMHC insured.
You benefit from growth of the propertys total value, not just the original investment, which multiplies your returns. The principal of the mortgage is paid down by your tenant who, over time, essentially buys the investment for you.
Calculating Real Estate Returns
Unlike a stock where the only measurement of a return is the price increase of the equity there are 3 to 4 factors, which contribute to the overall return in a real estate investment.

They are:
* Property Appreciation often the largest return on a long-term hold asset which is held with the intention of producing rental income. This appreciation is tax free, until sold, like an RRSP, and then it is usually treated as capital gains which is taxed at only 50% of regular income or it is taxed as a dividend if held in a corporation.
* Principal Reduction of Mortgage adds to the equity but is paid by the tenant in the form of rent.
* Positive cash flow could be negative to very positive or even substantial especially in recent years! Normally, you want to have positive cash flow from day one but often you will need to re-invest all the cash flow into the building in the first 9 to 15 months after acquisition to improve the building, and thus the value one to three years down the road.
* Possibly, tax losses in year one or two of a venture. This figure is usually 0 in a joint venture, but could be a small amount in a limited partnership scenario (dont invest in a venture where the key benefit is a tax loss! Always, always treat a possible tax loss as a bonus and dont include in your calculations).
In a Real Estate Investment:
* Your tenant or tenants pay down the mortgage, which increases your return and essentially buys the investment for you.
* Each time your mortgage is reduced, your investment return increases.
* There is usually an initially small, later larger amount of money remaining each month even after mortgage and other expenses are covered (note this is usually taxable as income!).
* This money also contributes to your overall return.
* Even though you've only put up a portion of the cost of the entire investment, you benefit from the entire growth of the property value.
Income Streams from Real Estate
Once the principal on your investment is paid, or even well before it is paid off in its entirety, the monthly rental payments from your tenant become monthly income for you.
* Rent generally doubles in Canada growth markets every 15 years (this is over 4% annually more than the 3% real estate growth we have assumed earlier!).
* Rental income is a great way to hedge against inflation as it increases with inflation, and in most cases at a quicker pace important in the future as Canadian interest rates and thus inflation may rise in the latter half of this decade
* Owning 5 or 6 properties, can generate a substantial monthly income that will continue to increase with your life expectancy.
* The property can be managed for you - there are no property management hassles (this is a major reason why many people shy away from real estate investments)
* The key is positive cash flow: more money comes in than flows out! This is not possible in many parts of the world because prices are so high that rental properties dont make sense unless purchased with very large down payments such that ROI s get smaller and smaller.
Calculating Stock Returns
Unlike real estate, the only measurement of return on most stocks is when its price goes up. To generate income from a stock or mutual fund, the investment must be sold, unless it is a dividend rich stock.
Real estate produces income each and every month while at the same time the mortgage is usually paid down while the value of the property usually increases and it is inflation proof and it is a good investment even if the economy is flat or declining there is always a demand!