Comments on REI
January 28, 2007
There was a lively and interesting discussion over at Canadian Capitalist in reference to a Re/Max press release about the appreciation of real estate over the last 25-years. I had the following comments, but thought it would be better to place them on my blog.
The gain in real estate value over time is really only important to the average Joe who only owns their primary residence, and even in this case, most people are unlikely to use the capital appreciation in the property for any real purpose because they will likely hold the property for a long time. Also, if they do sell, it will likely be reinvested into another property which has also appreciated the same amount over time.
Now, for someone who is investing in real estate, I also think that these numbers do not mean much. The real value of real estate transactions is that they are a business, they can generate income and cash. I think of it this way, I have one rental property that only cost me $10,000 investment. After all expenses are deducted from rents, my net income on the place is roughly $7,000 / year! Therefore the property is netting a 70% ROI.
These returns are not typical of all investments, but there are some good deals to be had, and some specific market segments where you can generate a tidy return.
The big players tend to invest in commercial properties, or large complexes. In these cases, again, the focus is on your net income, not on the appreciation of the assets.
Also, even for the average Joe, there are a lot of advantages to investing in real estate:
1) capital can be withdrawn if necessary, when renting your money is all lost
2) appreciation does beat inflation, so it is a relatively safe investment (historically). You aren’t likely to lose your shirt.
3) it is a kind of forced savings plan. Most people don’t think about how much equity is in their homes. If something catastrophic happens, the money is there and can be used for health care expenses, etc…. as long as the person is willing to sell the house or take on debt (bad idea).
Just my 2 cents. I generally don’t even think about the increase in property values… it just isn’t money that I can easily use.