Building Wealth: The Tradition of Thoughtful Real Estate Portfolio Building, PART I Investing in Real Estate, Versus, Say, Stocks and Bonds.
”Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full and managed with reasonable care, it is about the safest investment in the world.”
-Franklin D. Roosevelt
There is no wrong time to begin working on your real estate portfolio; but the longer you wait to plant, the longer you wait to harvest.
What are the benefits of holding real estate in a portfolio over, say, stocks and bonds?
Real estate is a good fit in a well-rounded portfolio. This is because real estate has qualities that increase the returns of a broad portfolio, while reducing portfolio risk.
If you already hold an RRSP, or a managed portfolio of financial instruments, or stocks and bonds, you will find that real estate is a great counterpoint to these. Real estate, as an investment, comes with its own maintenance costs, but has a track record of low volatility. In addition to this historic growth and low volatility, the sector’s positive attributes, in terms of asset allocation, are well studied and written about. Real estate investment has a very low correlation with other classes of investment. This means that in a five-year period where your GIC is under-performing, it is historically likely that your real estate portfolio will grow more aggressively.
As a part of a broad portfolio, real estate will tend to allow you to achieve a higher return for a given level of portfolio risk. Adding real estate to a portfolio can tend to maintain your returns while decreasing risk.
Your real estate returns are generated in two ways.
The first: In the short term, the returns are linked directly to rents received from tenants. The second: Selling properties which have grown over time and/or have been improved, at a profit.
Real estate also offers insulation against inflation. Leases may contain provisions tying rent increases directly to inflation and rental rates can be increased whenever a lease term expires and the tenant is replaced or renewed. This does serve the same purpose passively. In both cases, real estate returns (“dividends” or “income”), tend to accelerate in an inflationary economy. This means that an investor is allowed to maintain real returns in real estate, unlike the stock market.
Real estate is a tangible asset.
A real estate investor is able to manipulate and influence the value of their portfolio in a way that they cannot in, say, stocks and bonds. While a massive hedge fund may be able to make some impact on a certain publicly traded stock, a lone investor will not have access to any levers of value. A real estate investor has some sway over his real estate portfolio, which even a Warren Buffet might envy. An investor can make their whole portfolio, or a single property therein, increase in value or in performance. A leaky roof can be replaced, curb appeal can be improved, a building with higher quality tenants can be rejuvenated; and these are just a few examples. An investor has a great deal of control over the performance of real estate investment. Much more control than in other types of investment.
Because of the nature of real estate, as real property, there are opportunities, unique to real estate, for an investor to build value. You cannot increase the value of any share by printing it on better paper. You can however put a hundred dollars of paint in a room, in the right property, and sell it for thousands more.
There are several ways for a savvy investor looking to boost the value of their real estate portfolio. An investor could tap into economy of scale for instance, or leverage held property against improvement or expansion of their portfolio. With experience, and the help of a dedicated broker, there is ample room in the market to “bargain hunt” for properties with unrecognized potential profit.
Of course, remember that all the rent collected, as well as the improvements made, are in service of building a windfall (should such a strategy make sense for your particular goals) at the time you make the choice to cash out of the market. Many family fortunes have been made by accumulating, and passing on a real estate portfolio. Cashing out is not necessarily the only goal.
With a thoughtful, strategic, and methodical approach; and, with the expert help of your broker, you will find success in real estate investment. In Part II, we will dig a little deeper into the ways a successful investor can find an edge in the Montréal marketplace.