It was at a trade show where I was exhibiting for Fraser Valley Rent 2 Own that I ran into a financial advisor.

He was promoting his investment business, portraying his meagre returns as outstanding ones.

I said that I offered far in excess of his measly returns for investments in my real estate business.

“Those are medium risk investments,” he stated, matter-of-factly.

Then I knew that we were operating in different ball parks. And I knew that he was completely naïve about my ballpark.

Reflecting on it later, I realized that he was treating real estate investing like stocks on the stock market. He was treating it as something to get into simply for its appreciation value.

And I knew that his license required him to do that. He has to treat his clients as though they are completely ignorant of investing. (Hey, if they weren’t why would they need him, anyway?)

In fact, stock market investments are almost completely different from real estate investments.

You invest on the stock market for two reasons: the primary one is to see growth in the value of the stock. The secondary one is for the dividends that corporations pay out to their shareholders.

These two are neither the primary nor secondary reasons for investing in real estate. If investors in his world know nothing, and that’s what he’s going by, then they may be “medium risk investments.”

If done right, though, real estate is far more lucrative than stock market investing, and often safer. But real estate investors must be somewhat savvy about real estate to achieve that.

In real estate investing school, one of the first big things I was taught was: “You do not invest in real estate for its appreciation (growth) potential. If you do, you are gambling. You might as well go to Las Vegas and try your luck there.”

To be sure, many do invest in real estate primarily, or even solely, for their appreciation value. Over a long period, they usually win. Stats tell us that over the very long term, real estate has gone up an average of 5.75% per year. But real estate investments are not as liquid as shares on the stock markets. So, you have to be patient, wait for the long-haul if you aren’t in an immediate growth cycle.

Many don’t have the patience to wait. Many are gamblers. Some are lucky; some are naïve.

The reason real estate is far more lucrative but still extremely safe is because there are eight profit centres (ways to make money) in real estate, not just two. And the two associated with stock market investing are probably only the third and fourth ones for real estate investments (my ranking).

So, what are the eight profit centres? (Note: only the first four are ranked.)

  1. You buy right. The old adage is: “You make your money the day you buy a property, not the day you sell it.” You simply don’t buy anything that you don’t get under-valued. That takes work. Again, from real estate investing school: “You check out 100 properties, you offer on 10, you end up buying 1.”
  2. Principle paydown. Someone else pays down your mortgage. The rent you charge on an investment property must at least cover all your costs, including your mortgage payment. A chunk of that payment goes to writing down the principle on our mortgage. You gain equity every month.
  3. Passive appreciation (equivalent to stock growth). As mentioned, over the long-haul, housing values tend always to appreciate. No one in this market is unaware of that. The accelerated appreciation of recent years won’t last forever but, over the long haul, one should still be OK if one has the funds to be tied up. Trying to time the market, though, is a gamble.
  4. Cash-flow (equivalent to dividends). No one should rent out a property that doesn’t provide a little extra cash flow each month after paying the bills. Even $50/month adds to its value. A negative monthly cashflow can be justified only if it has overwhelming positive numbers on the other 7 profit centres.
  5. Forced appreciation. By doing renovations wisely, value in excess of its costs, can often be added to a property. But the key word is “wisely.” There are many renos where their long-term value is less than their costs. Knowledge is key, and handiness a bonus.
  6. Tax Savings. When you own an investment property, you essentially own a small business. You report it on your income tax return. But you get to deduct your expense from the income you declare (primarily, from profit centres 2 and 4). Some ingredients, such as appliances, are even depreciable. The tax savings extend to the balance of your income; that fact alone can make real estate worthwhile.
  7. Leverage. Unlike for stocks, banks will lend you most of the money to buy real estate. (Does that tell you that they know it’s a better investment than stocks?) Typically, you can get a mortgage for 75-80% of the property value. So long as your interest rate on that loan is below your net earnings on the property, you’re, in essence, “printing money.”
  8. Reinvestment. As you write down the mortgage principle and the property simultaneously appreciates, you eventually (sometimes, quickly) have sufficient equity to refinance the property, take out some of your equity in cash, and use it to invest in another property with its eight profit centres.

Ninety percent of all millionaires have made or keep their money in real estate. It is, by far, the best way to get ahead financially.

But where do you start, you ask? By owning your own home. Then you can use it for leverage and reinvestment in real estate. And, if you need help getting into your own home, rent 2 own may be the way to go.

At least, that’s how I see it . .  .