Real Estate As An Investment
Hey all, just wanted to bring up real estate as a topic for investment. I have a couple of rental properties myself here in Canada that I am happy with as investments. I like them because the income is predictable enough to comfortably take on debt that I would definitely not be comfortable taking on to purchase stocks or bonds or even etfs. I feel real estate is a decent hedge against currency inflation but rising interest rates could be detrimental to my return on investment and to property values. I've heard Preston comment on real estate periodically and seem to remember him saying if interest rates go up and property values happen to decline, the biggest losers would be the ones holding the equity in the properties. I'm not clear what he meant by that. Anyone have any insight on that or real estate in general?
Comments
I think what he said was applicable to the case of having to sell in a down market if you have a variable-rate mortgage. I'm not sure how it would work with a fixed-rate mortgage. I've seen that happen with variable-rate mortgages before. Someone buys a property for a certain value on a particular rate. If the property values goes down, and they have to sell it for some reason, they get less than the value of the mortgage that they still owe. If, in addition to that, the rates go up... they are then paying even more without being able to get the value back.
Are you aware of any learning materials that aren't specific to Canada or other particular countries? I'd love to find a good course or book which would focus on the general principles.
I'm a huge fan of real estate and I love to talk about it at any time
TrevorD, in your post you talk about why you linked real estate: "because the income is predictable enough to comfortably take on debt". There are 2 things (actually like 10! ha) that come to mind about that statement.
1. I like to think about real estate like I do bonds - "income is predictable"
2. To buy real estate you typically use debt
Therefore, when interest rates go up, real estate prices tend to go down (or at least makes them more expensive). The same thing happens to bonds - their price decreases as interest rates go up (look up YTM). In regards to the equity piece, because you are using leverage, small changes in the value of the property are quiet large in comparison to the equity (down payment).
In reality, I think we could talk a lot longer than this on this topic.
There is a fairly consistent demand for let's say $1000 per month on housing. At 3% that loan will afford about 250k. At 9% that loan will afford about 125k. You don't want to own a bunch of 250k houses when consumers can only pay 125k for them.
Like you, I've been trying to figure out how prices will be affected by interest rates going up in the future (albeit..who knows when they will go up).
- If interest rates go up, certainly prices of properties have the potential to go down. But, if interest rates go up, shouldn't rents also go up because less people are able to afford to own their own property?
-Rahul