Solid and Consistent Returns
How many people do you know that lost money over the last 5 years in the
stock market or with their mutual funds? How much have you personally
lost?
Now contrast that with your personal residence. How much money have you lost on
the value of your home? How many people do you know who have lost money?
While it's true that no investment, including a personal residence, is
loss-proof, history has shown that in general, in most markets, real estate has
provided the most stable, long-term consistent return on investment.
Market Speed
One factor that helps stabilize the real estate marketplace is the speed of
finding, pricing, and buying a property. This process is extremely slow compared
to the stock market.
How does someone buy some stock? They call a stock broker or sign up for
online trading, and once they are set up, they can pay a small commission and
typically buy or sell a stock in a matters of seconds (that's right,
seconds).
Quick and efficient.
How does someone buy real estate? It's a long process in which they...
- Call a real estate agent to show them a list of houses, or they search through print or online classifieds
- Pick a few houses with features they want and drive around to look at some of them
- Make an offer, negotiate, and counter-offer, sometimes more than once
- Hire an inspector, an appraiser, and apply for a mortgage
- Find problems with the property, so they re- negotiate with the seller
- Wait several weeks to several months for the closing date, and finally...
- Move in (if it's a personal residence) or rent the property (if it's a rental)
The slow speed of the real estate market helps to ensure that prices and investment values also move slowly.
Price Volatility
Another factor that helps real estate provide stable returns is the relatively
low price volatility -- in other words, price swings are not normally as drastic
as in other markets.
Many people are familiar with the stock market, where a bad press release or
company earnings report can make a company's stock price plummet within minutes.
With real estate, information doesn't travel nearly as quickly. It's virtually
impossible for home buyers, sellers, or even speculators to keep track of all
the information that affect the value of a home. Factors such as new highways,
gas stations, noise and environmental pollution, neighbours, etc., can all
easily affect prices, but it can take time to discover them.
Lower volatility helps homeowners and investors 'sleep better at night'
because they know that, unlike a stock, their investment will not drop 50% of
it's value overnight.
Consistent Long-Term Increases
As mentioned by Dr. Anil Mody in our
October 2004 issue of the Spirepoint Insider, there are many things that drive real estate prices up
over the long term. Some of these include:
- Cost of labour - A fact of life is that the cost of goods and services goes up over time. This increase puts upward pressure on employee salaries, which has a direct impact on the labour cost for building and renovating homes.
- Cost of materials - As costs go up, so does the price of new homes. These price increases drive up the prices of nearby resale homes.
- Increased demand - Hundreds of thousands of immigrants come to Canada each year. Everybody needs a place to live and this puts upward pressure on home prices.
This article is copyright © 2004-2010 Spirepoint Properties. All rights reserved.
Paul Blacquiere and Joanne Beehler are full time real estate investors and have been investing in Ottawa, Ontario, Canada since 2002. They are owners of Spirepoint Properties, a Canadian real estate investing company dedicated to making real estate investing easy.
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