The Seven Profit Centres of Real EstateFor the most part, people “get it” that owning real estate is a good investment.

“I’m tired of paying someone else’s mortgage,” is the theme I hear most often. And rightly so! It feels like throwing away money every month. In thirty days your purchase is consumed—gone! No long-term benefit. And the next thirty days starts over, a cycle to be repeated every month.

But many people don’t really understand all the benefits there are to owning real estate, or why most savvy investors pour almost all their money into real estate. Off the top, we can usually come up with one or two good reasons. But, did you know that there are usually considered to be seven profit centres for real estate, i.e., seven different ways to make money on it? (Ok, I guess the title already gave that away.)

Today we touch on the first, and maybe most obvious one: appreciation. Lots of people get into real estate primarily for the appreciation value. They see prices rising and want to get in on the supposed gravy train. They get in, and then the market levels off or, worst case scenario, even drops back a little. In the somewhat volatile world of real estate, like most investments, some do well if they time things right, others don’t.

The fact is, that getting into real estate strictly for the appreciation value is a bit of a dangerous game. It’s a soft gamble, not unlike the stock market. 

The fact is also, though, that real estate is usually only a very soft gamble. The swings are rarely as extreme as the stock market, and certainly the risk is much less than a night at the casino. The fact is, too, that real estate rarely drops and when it does, the drop is pretty mild, compared to what can happen with other investment. Unlike the Nortels and Bre-X’s of this world, it never becomes worthless. In fact, a “massive” drop in real estate has rarely ever hit double digit percentages. Even a plateau is often feels like a massive pull-back (which is what happened in the Fraser Valley from about 2008 until 2015.)

The biggest real estate investment risk is leveraging it too highly, so that a downturn consumes the equity one has in the property. A tiny drop in the value of the property may mean a much larger drop percentage-wise, for the funds one has invested in the property. If one is forced to sell at such a time, money can be lost, or at least, its growth emasculated.

Here’s another fact, though: over the long term—decades and centuries–real estate tends to rise 3 – 4 percentage points per year. If appreciation was the only profit centre for real estate, that would still be as good as the average mutual fund, and certainly better than the interest you’d get from your savings account at the bank.

The bottom line: as an investment primarily for its appreciation value, real estate is risky on a short term but extremely solid over the long term.

For its appreciation value alone, I’d rather gamble on Bitcoin. But appreciation is not the main reason one should get into real estate. 

Next time we’ll discuss what I consider the biggest reason to get into real estate. Hint: it has more to do with the theme I quoted at the outset.