From the volatility of the stock market (Nortel, Enron, Worldcom, etc.) to the low, slow and safe bet on Canada Savings Bonds, T-Bills, GIC’s, etc. where can you maximize your return on investment?
Maximum growth and security have always been at the opposite ends of the investment scale.unless you consider real estate. In today’s market, with so many different places to put your money, why does real estate still stand out as the single most effective way to generate a healthy return on your investment?
There are four main reasons why more people make their fortunes in real estate than any other type of investment.
1. Positive cash flow
- Roughly speaking, there are two ways to get positive cash flow from a rental property:
- The capitalization rate exceeds the annual loan constant where the loan-to-value ratio is normal (70 to 80%)
- The loan-to-value ratio is abnormally low (60% or lower)
- The precise formula is that your loan-to-value ratio multiplied by your annual constant must be lower than your cap rate to get positive cash flow.
- The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
- The amount of debt used to finance a firms assets. A firm with significantly more debt than equity is considered to be highly leveraged.
- Leverage can be created through options, futures, margin, and other financial instruments. Leverage increases one’s risk.
Equities have historically proved to be both an excellent vehicle for long-term growth of money and a hedge against inflation, delivering a compound annual growth rate of 10.4% from 1926 to 2003.* Although past performance is no guarantee of future results, this record of achievement demonstrates that common stocks offer the potential for capital appreciation that investors need in order to reach future goals.
4. Principal Reduction
A mortgage or principal is the amount of money you actually borrow from a financial institution to bridge the gap between your purchase price and your down payment. Your principal borrowed is then paid off over a number of years; 25 years is an amortization commonly used.