LEVERAGE – real estate allows you to obtain a $100,000 house with only a $20,000 down payment. The bank gives you the balance, the tenant helps you pay the bank back. One cannot attain the same amount of leverage buying stocks.
ABOVE AVERAGE RETURNS – with the right investment, real estate will pay out more the letting your money sit in the bank (1%) or even blue-chip dividend stocks (5%). HML focuses on properties that provide a return on investment (before appreciation) of at least the average dividend yield of blue chip stocks. Cash flow from properties much be greater than the return of a high-interest savings account.
APPRECIATION – while we never count appreciation when reviewing potential property purchases, appreciation will make you King of the Hill, it puts you over the top. Our investment in a small $60,000 condo in Edmonton Alberta in 1998, did not appreciate a cent for 7 long years. Our cash flows started off well but became negative after a few years, but not severe enough to sell. All this time our mortgage was being paid down, and our return (ROI) slightly positive. Finally, in year 8, the values jumped. We sold the condo for about $105,000 gross.
INFLATION HEDGE – hard assets are always a hedge against inflation. If the price of a house sky-rockets due to inflation, would you rather be the home owner or a tenant?
ABILITY TO REFINANCE – over time as property values increase, the ability to refinance an investment is great in theory. Unless the property has appreciated significantly in 5yrs, you will not be able to pull out funds from your property. Expect to be able to pull equity out of a real estate investment after 10yrs if the property has not appreciated significantly. Mortgages are typically 25yrs and are heavily interest weighted for the first 5-7yrs.