Why Real Estate Is The Perfect Investment

different asset class“There is a truth deeper than experience”, says Gregory David Roberts, that brilliant Australian writer. I think Roberts nailed it there. The whole wisdom of real estate investment dawns on us not when we become old enough to understand it (or else senior citizens would all have been millionaires) but at the time when we learn to read between the lines.

There are great rewards to be had in real estate if we come close to that wisdom.  Let us first understand why property investments are so important. A few trivia for you:

  • Statistically, 1/3rd of the entire world’s wealth lies in real estate.
  • 97 out of 100 millionaires hold property portfolios.
  • The population surge, calculated as the number of ## (births-deaths) + migrants ## each year supports the theory of ever increasing property demand.

Elaborating on the third bullet point- It can be safely assumed that the demand for property is expected to increase because the brilliance of medical science is going to create further gap between births and deaths and global migration is not going to cease any (at least in the foreseeable future).

A home is a very different kind of asset class

A home is not only an asset, it is an altogether different class of investment as it allows you to avail the asset at the same time- after all, you live in your home, while using it as an asset for a future day. A whole chunk of owner-occupiers and FHBs would vouch for this.

To be called a perfect investment, any asset has to pass the five age-old principles of wealth creation.

The asset should:

  1. Create income
  2. Create Equity
  3. Create Leverage
  4. Create Appreciation
  5. Allow Deductions

Real estate- the perfect investment- does all this and does not break a sweat. Let me elaborate a little on this.

Creating income

It generates a positive cash flow. Properties provide the traditional facilities of renting and thereby earning a passive income (the maintenance notwithstanding)

Allowing tax deductions

You can earn by seeking tax deductions from interest paid on negatively geared properties. You can also earn deductions by using your capital gains and losses shrewdly.

Creating Equity

Each time you pay mortgage, you build equity in your home. This equity can be used to borrow more money for enriching your portfolio further. Borrowings based on home equities are typically charged at a lesser rate. Also, because they provide ready collateral, home equities come with a lesser burden of upfront cost.

As an intelligent reader, you can easily understand how this helps you with the Opportunity Cost bit, allowing you to invest the saved money elsewhere and generate profits for yourself.

Creating appreciation

I heard somewhere that one of the most sought-after future professions would be that of Vertical Farming. With an exceeding shortage of land, farmers would have to grow crops vertically on various storeys (same as multi-storey parking).

Apologies for taking a long route round the original point but the fact is that there isn’t any more land being created and developers are already fighting tooth and nail for what already exists.

It is needless to say that scarcity invokes a price rise (at least if you follow masters like Keynes or Smith). Anything which is scarce is likely to appreciate in cost and this makes properties an ever-ready-to-appreciate asset class.

Creating leverage

When you buy properties through financed money; you make money out of other people’s money. This is the beauty of leverage. Leveraging capital gains to pull off a new purchase is another smart technique I would presume.

“Be greedy when others are fearful”. Make the most of these times and make a wise property investment. It won’t be found wanting.

Can you think of any other asset that passes all five tests?