What makes real estate go up in value?
Contrary to popular belief, real estate doesn’t go up in value. The change in prices is only an aberration reflecting the devaluation of paper currency due to inflation. If you can come to appreciate this fundamental principal it will help you to make a lot of moneyin real estate investments.
To help you better understand, real estate is a constant, a bell weather, generally real property if anything devaluates over time through wear and tear, obsolescence, or changes in fashion and taste. However as money devaluates over time it takes more paper dollars to acquire the package of utility that the property represents. Yes it is true that there may be variations on this theme due to supply and demand factors. For example, people flocking to Alberta due to the oil boom faster than homes can be built has caused the price to be driven up, or the collapse of property values, for example, when a mine closes in a one industry town. But these plays are highly speculative and can turn against you as much as work in your favor.
Trying to get in and get out at the right time with the transaction costs what they are, is difficult. Buy low, sell high is the axiom! But these days you would have to say buy high sell higher, and hope there is something left after the land transfer taxes. Few people would sit down to a game of blackjack in Las Vegas with a purse of ½ a million dollars or make a purchase on the stock exchange of the same amount of money on the hope that they could catch the win and get out before the price goes down or the cards turn against them. But average people do this every day in real estate.
The sure way to win with real estate is as a long term holding.The win is not actually as a result of the property going up in value, but as a result of the borrowed mortgage money going down in value or purchasing power. If money devaluates by 5% annually, in 13 years your mortgage is being paid back with 50 cent dollars. Were you to sell the property at this time it would likely sell for twice what you paid for it because the purchasing power of the money is half.As an example: you purchase a property for $500,000 and for sake of example, you finance 100%-$500,000 paying interest only. 13 years later you sell it for 1 million, repay the $500,000 mortgage for a profit of $500,000. But in reality that is only 50 cent dollars of tomorrow. The purchasing power of which is only $250,000. So the principal assumption is to have the largest mortgage possible where the payments can be maintained by the rental income. This is a proven strategy which has worked well for me over the years.
Also worth noting is that if there is a shortfall between the interest cost of the mortgage and the net rental income it would likely be deductible against earned income for tax purposes. (Check with your accountant) To my understanding if the shortfall is considered to be a business loss (i.e from the business of renting the property) such shortfall would be deductable from your earned income for tax purposes dollar for dollar. If you consider that the loss is actually being converted into property value as the prices inflate it is actually flow through. On disposition this value will be taxed as a capital gain that is included in income at only 50% of the gain therefore 50% of that income is never taxed. That’s better than any RRSP. With the additional bonus that you can leverage against the equity in your property investment you can’t leverage against your RRSP.