Benefits of Real Estate as an Investment Vehicle
March is over and Spring is here! That means my girlfriend Shelby's birthday month is over, and finally we can get back to real estate! As it should be. That's us down below celebrating. I wanted to tell a little bit more of why I’m interested in real estate investing, and why I think it has some advantages over some other types of investing.
I believe there are three main advantages with real estate investing: CONTROL, CREATIVITY, & LEVERAGE. Typically in stock investing, the only control you have is voting annually, the only creativity is when to buy and sell, and typically people wouldn’t advise to take out a loan and buy stocks. By combining control, and creativity, you can force appreciation on a real asset, and through leverage you can multiply that return for some pretty staggering results. When I learned this, the light bulb went off! Let me explain:
With real estate you can literally improve value of your investment with literally your own hands. Unless you’re Warren Buffett, Tim Cook is probably not going to answer your call and act on your recommendations for the direction of Apple. With real estate you have control over the asset and you can use this control to improve and maintain value. You can choose tenants, control construction costs, control ongoing costs, change the layout of the house, change the use of the land, or all of the above and more.
Creativity & Undiscovered Value
To outline some creative ways to improve value I’d like to use my 220 William St. project as an example. I didn’t have a lot of money and I still had a student loan, but through creativity and hard work I was able to create a successful investment. I bought literally the cheapest house in Shelburne with 5% down. I put some sweat equity myself, and got a lot of help from family and friends. Here are some of the creative strategies I used to improve the value of the asset:
- Sweat Equity - did quite a bit of work with friends and family
- Brought in Joint Venture Partners (Mom & Dad)
- Added a bedroom and bathroom (adding value)
- Renovated the house (adding value)
- Split the existing house into a legal duplex (adding value)
- Severed a new lot off the backyard (adding value)
See how creative you can be with one asset! When I invest in stocks, and crypto-currencies, I’m not very creative when I obsessively hit refresh on various tickers I watch.
When you compare the stock market and the (GTA) real estate market it looks like they are about equal at 6% return over the long term. But when you add leverage to the equation it changes things. Usually, a bank would not give you a loan to invest in the stock market. However, banks will loan you money to buy a house, usually at least 80% of what you need, giving you a 5x multiplier if the market goes up. For example if you put $20,000 down on a $100,000 house and it went up 5% in one year. That house is now worth $105,000, $5000 more than a year ago, netting you a return on investment (ROI) of 25%. If you buy a house with 5% down, and the house improves in value by 5%, you’ve just made an ROI of 100%, pretty crazy.
The discussion above is why I’m investing a lot of my time and money into real estate. Understanding control, creativity, and leverage was a game changer for me, and I'm learning everyday how to use these tools as efficiently as possible!
Let me know what you think!
Spencer Brown Brown Properties