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'm interested in learning more about Real Estate too. Sometimes I look for books and other resources, but they tend to be specific to particular countries, because of the taxes and related laws. I haven't seen resources on general real estate principles that are applicable across countries.

    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.
  • Hey @TrevorD & @Aidan_Sweeney,

    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 <b class="Bold">expensive</b>). 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.
  • Thanks for the replies guys, sorry it took me so long to log back in! Any of the books I've read have related to investing in Canada where I live. I have come across a couple of decent podcasts as well. Again one is based in Canada, the other in the u.s. Breakthrough real estate investors podcast is Canadian, specifically Ontario, but it's good because it deals with many different strategies I.e. Fix and flip, buy, fix, refinance, etc etc. Different provinces in Canada have different laws but the principals remain the same. Bigger pockets is U.S. I haven't listened to much, but it is supposed to be good as well. If I find any books about real estate investing in general, I'll post them
  • Asset prices definitely fall in high rate environments. For example, a person that qualifies for a 100k loan at 3% pays 250/ month in interest. At 9% on the same loan interest will be 750/ month. This difference in price significantly decreases demand and therefore decreases price. Cars, property, land, and productive assets should all see this drop.

    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.
  • Absolutely! I totally agree Buckmaster. If interest rates were to triple though(unlikely in the next few years, but very likely in the longer term), a lot of home owners would be forced into foreclosure/bankruptcy. They wouldn't get financing for another home and the demand for rental properties would increase, pushing rental prices up relative to property prices and increasing the yields on revenue property, so there's a little bit of protection there as long as the landlord can still service the debt on the property. I think the low interest rate environment has hurt the yield on revenue property as well, but still not a bad investment compared to stocks and bonds. I really believe the absolute best investment out there right now is debt repayment. Guaranteed return with no downside!
  • The lucrative aspect of real estate is leverage, as much as 10/1 or more. Stock on margin is only 2/1. It needs a good cap rate to work. An inflationary tail wind is very helpful, possibly the cincher. It's as simple as that. I have 2 houses worth about $600K. With 3% inflation I would be making $18,000 / year. As Jesse Livermore said, "The big money is in the sitting." It's pretty hard not to sit in real estate, although I prefer Laing here on the couch with my iPAD!
  • Hey, I'm glad you started this discussion. I also invest in real estate and currently own a commercial property in Canada. i've been doing reading and trying to decide if I should invest in another property at this time. I live in Calgary, Canada. I'm mainly been looking into commercial.

    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
  • I was thinking the same thing Rahul, not sure how commercial rates would be affected if interest rates go up! I currently own a 4-plex and joint venture own a duplex in Medicine Hat, AB. I'd like to own property in Calagary! How do you find commercial property there right now with the recession, have vacancy rates increased a lot? I was just there last week an it seemed like a lot of light industrial vacancies, I didn't notice a bunch in commercial. I'd like to talk more about return on investment in commercial vs residential and if there's strategies to getting financing for commercial property.
  • One of my brothers also invests in real estate. He thinks that this is a good way to get long term benefits. He lives in France and before taking any real estate decision he contacts his lawyer Bechara Tarabay after finding him at http://www.facebook.com/public/Bechara-Tarabay. I am too planning to invest in real estate. The real estate is going to serve as a long term investment.
  • Correct me if I am wrong...doesn't real estate deliver, without leverage, around a gross 3% excluding eventual capital gain (and the rent does not increase at the same pace of inflation...)?...there was a time I looked about real estate return all around the globe and this is what I remember...
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