Tuesday, October 13, 2015

"The Rich Get Richer" Thanks To Real Estate

Recently we came across an article in which it is stated that the rich have been getting richer in the developed world due to owing real estate.  It struck a chord and is something that is hard to argue with.  Given our profession we can relate to these findings.

Through the day-to-day dealings of working in commercial real estate, we are often in contact with many successful entrepreneurs, business owners, professionals and corporate executives.  Luckily we are able to gain great insights into what makes these people successful in their business and financial lives.  Often a large component of their financial success comes from (owning) real estate. 

Whether owning the building their company is in, investing in residential or commercial income properties or simply owning their home,  a significant portion of their net worth is invested in real estate.  Over the long term being an owner of real estate assets has tended to work well.  With real estate prices being at all time highs in many different sectors and markets, this seems a relevant time for this discussion and we will piggyback off of the rich get richer idea, with some reasons why real estate assets have performed well over the long term and why the trend should continue into the future:

Source: Rich & Olivia
  1. They are hard, tangible assets.  Compared to buying financial assets - i.e. stocks or bonds, which are essentially paper assets - real estate has tangible value (you can live in it in the example of a house, or farm it in the example of farm land).
  2. Over the long term they are an inflation hedge, as rents and construction costs rise.
  3. Land is scarse and they aren’t making any more of it!
  4. The population is growing and with advances in modern medicine this doesn’t seem to be a trend reversing itself any time soon.
  5. You can use leverage to increase your returns or acquire assets that you don’t have the cash to pay for.  Financing options are also robust in developed markets.
  6. Historically low and falling interest rates.  Although no one can predict the future, even if interest rates rise substantially, they still would look like a bargain compared to previous cycles (hello 20+% in the early 1980s).
  7.  Continued innovation and technology to propel economic growth and therefore peoples' standard of living.
  8.  In the example of investment properties, they pay income, as opposed to some other asset classes such as stocks that don’t pay dividends or investing in commodities.  Good for retirees or people who live off of a nest egg and need the income.
  9. Easy to understand.  Whether it be residential prices in your neighbourhood, or prices for apartment buildings.  The concepts for valuation (comparables, cap rates) aren’t difficult to understand.  Some other assets such as stocks and bonds are more difficult for novice investors to understand.
What are your thoughts on the effect of real estate assets over time? Leave a comment down below.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

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