Solid reasons for investing in real estate

Stocks are not for the faint at heart. It takes constant vigilance and a great deal of stamina to survive the roller-coaster ups and downs of an investment that is heavily dependent upon the latest news story and its effect on economics.

What about real estate? Has it done better than the stock market? Let us take a look at Bill and Marsha, who each have received a $10,000 inheritance. They are not sure where to invest their proceeds.

Conservative Bill invests his $10,000 in the stock market. With interest in the Internet still growing, he puts it into a S&P 500 index fund.

A renter, and inexperienced in the stock market, Marsha uses her $10,000 as a down payment on a $100,000 condominium. Fast forward - 12 years.

Who did better on their investment? You be the judge.

Bill's return - from stock market holdings: Since 1990, the S&P 500 more than tripled. From his initial investment of $10,000, Bill made about $22,000, pre-tax. During the same period, the value of the S&P 500 quadrupled, so Bill's gain was roughly $30,000, pre-tax.

Marsha's return - PLUS reaping the benefits of home ownership: What about Marsha? During the same period, home values increased roughly 4 percent per year nationally (MUCH more than that here in BC). At that rate, Marsha's $80,000 condominium is now worth about $126,000. If she sold it, her profit would be about $46,000, tax-free.

On average, most Canadians invest and earn more in their homes than they invest and earn from their savings accounts, stocks, bonds and other investments combined. Gordon Pape, recognized Canadian author and financial advisor, suggests that home equity remains a cornerstone of most families' wealth.

Real estate is a solid, familiar investment In addition, there are several other solid reasons for investing in real estate:

Automatic savings. Contributing towards a mortgage automatically forces a family to save. Paying down a mortgage rather than paying rent, contribute to future security.

Appreciation. By nature of continuing population increases and the laws of supply and demand, home prices rise. According to the Fraser Valley Real Estate Board, a home purchased in January 1997 for $123,530 now sells for $467,000.

Tax-free profits. When your home is your principal residence, and you sell it, you will not pay tax on any of the profits. This is one of the last and greatest advantages for building wealth left in Canada.

Growing Equity. Even at a modest rate of appreciation, real estate yields a higher return on actual cash invested than most other vehicles. Each mortgage principle payment you make is a payment to yourself. You build equity as your mortgage principle shrinks. Your equity is also a valuable commodity, and could use the significant gains in equity achieved the last few years to obtain additional financing, move-up to a larger home or acquire a rental property.

Consistent returns. Over the long term, real estate has consistently proven to grow significantly in value. Just look at how far values have come in 30 years despite occasional "corrections" which tend to be brief and offer great buying opportunities.

Lower your taxes. You can claim deductions for costs incurred and don't forget deductions for depreciation.

Generate Income. Properties yielding a pre-tax positive cash flow are harder - but certainly not impossible to find. Remember, a positive after-tax cash flow can still come from a negative pre-tax cash flow. You may also be able to use depreciation to shelter other taxable income.

Use Leverage. You can 'magnify' your return by borrowing a large part of the purchase price. By limiting the cash you invest, you can dramatically increase your return.

Hedge against inflation. Real estate has long been recognized as an inflation-resistant investment, providing homeowners with a tangible incentive to save.

Buying your own home, or investing in one, is widely accepted by financial experts as one of the soundest financial commitments you can make.