Investing in real estate is one of the best ways to secure your financial future. Many people view homeownership as financially draining, but in reality, those who choose to invest can benefit financially in ways that renters can’t. Real estate investing is also a good option for beginners who are interested in diversifying their investment portfolio. Homeownership for millennials is on the rise and young couples can also benefit from investing in real estate. Here are the top three reasons why investing in real estate may be a good option for you.
1. Build Home Equity
One of the biggest obstacles to homeownership is affording the down payment, the amount of money paid upfront. The average home price in Canada in January 2020, was $504,350, according to the Canadian Real Estate Association. The minimum down payment for a house of this price is 5%, meaning the prospective buyer would need to pay $25,217.
Now, this all sounds daunting and difficult. Why should you worry about a down payment when you can just pay rent every month? Well, one of the biggest advantages to owning a home is the ability to build equity.
Here’s how it works. As you pay off your mortgage, you build home equity. It is the value of a homeowner’s interest in their home and is the property’s current market value. What does that mean for you as the owner? Home equity is usually the homeowner’s most valuable asset and is the portion of the home that you own. It will increase over time as you pay down the mortgage loan balance. How does this benefit you? Well, with your home equity you can take out partial or lump-sum withdrawal of your equity which you can use to fund your retirement, or toward another long-term investment in the future.
2. Appreciation Benefits
Your home can appreciate in value, meaning that it increases in value over time. The value of a home increases or decreases according to the local housing market. The house’s value can also be impacted by location, increased job opportunities, school districts, the age and condition of the home, and the market value of the neighbourhood.
What this means for you is that if you pay a $20,000 down payment on a $100,000 home, and the house’s value increases by 4%, you made $4,000. If the house increases in value and you decide to sell it, you can benefit financially from the house’s appreciation. Imagine if you bought a home for $200,000 and sold it five years later for $250,000. The house increased by 25% in value and you made a profit by selling the house for more than you purchased it for.
You can also increase your home’s value by making renovations and additions to the home. The house’s value can decrease if you don’t manage its condition, if the neighbourhood’s condition decreases, or by overall declines in the market.
3. Portfolio Diversification
Diversifying your investment portfolio by spreading out your investments across various mediums is an ideal way to secure financial gain. Investing in stocks is a popular way for people to make passive income. However, the stock market is often even more unpredictable for investors than the real estate market. Real estate is a lucrative investment and allows an investor to diversify their portfolio in different types of properties. Residential real estate investments are not limited to homes; they can also include residential rental properties, vacation rentals, and fix-and-flip investments.
Hopefully, now you have a better understanding of the benefits of investing in real estate. See, it wasn’t as daunting as you thought! If you’re new to investing or want some more advice, Christine Brayford is your real estate expert!