Why Real Estate?

The Importance of Owning Real EstatennIt is no secret that the greatest wealth-builder in history has always been investment in real estate. Real estate is more than just a fallback investment during a bear market. And, unlike the ‘paper’ investments of the stock and bond markets, carefully selected income properties have real long-term value secured by physical assets. Additionally, they are not subject to the wide fluctuations common to stock markets and, when properly managed, they can continue providing a steady return on investment of 10 to 15% per annum even when the real estate market is flat. With mortgage rates at historic lows and vacancy rates in prime areas hovering at 1.5%, investing in high-income properties has never made more sense.

So, why isn’t everyone investing in real estate?

In a sense, most people already are: Tenants pay monthly rents or leases to the owners of income properties in exchange for the use of the space in which they live or conduct their business. In addition to rent, the tenants may pay property management fees, financing fees, mortgage fees, and a multitude of other fees for services that the owners choose to provide in exchange for these fees.

All of these tenants (and in the case of commercial properties, all of the tenants’ clients) are trickling their money up (in the form of monthly rent, lease payments, or maintenance and strata/condo fees, etc.) to provide a return on the investments (R.O.I.) made by the owners of the property. So, although the tenants are receiving benefits from occupying the property, they are not realizing any residual income or tax-sheltering benefits from the ownership of the property itself.

A case studynnWhen asked what business McDonald’s is in, most people would immediately answer ‘selling hamburgers’. And although it’s true that McDonald’s has successfully sold billions of hamburgers for many years, they are most definitely not in the hamburger business.

The McDonald’s Corporation owns a great deal of the most valuable and coveted income properties all over the world. They in turn lease this property to their franchisees at a price that produces a profit every month well in excess of their cost of financing and maintaining the property, but not so much as to make leasing the property unattractive to the occupier.

These same franchisees not only paid for their rights to operate their store from McDonald’s, in most cases their franchise fees pay for the investment real estate that they are now leasing from McDonald’s as well. Wisely, McDonald’s doesn’t stop there. They also receive profits from the wholesale sales of food to the franchisee, as well as a portion of the profits of each location in the form of franchising, advertising, and marketing fees. We should all be so smart.

Bigger buildings, bigger profitsnnJust like McDonald’s restaurants, some of the most profitable income properties are extremely large and expensive investments that are leased to other businesses.

Office buildings, shopping centres, industrial parks and warehouses, lodging facilities, medical centres, and even power production facilities all fall under the category of commercial real estate. Under the right management, all of these can become excellent income properties.

A different form of large and lucrative income properties are occupied by residents rather than businesses. Types of residential investment properties include condominiums, rental apartment buildings, senior’s housing, etcetera. The cost to build or purchase desirable income properties like these can range from millions, to tens-of-millions, and sometimes even hundreds-of-millions of dollars, and requires an experienced property management team to operate and maintain them profitably.

Indeed property management is a whole other can of worms. It is one thing to have the funds required to purchase or build large investment properties, it is quite another to keep them profitably occupied, maintained, and managed year after year.

For this reason, many property owners choose to outsource their property management services to management firms that specialize in operating income properties profitably for their owners — of course, this valuable expertise is also provided for a fee. Even so, with the right mix of property, tenant, and property management, large income properties can be extremely profitable and worry-free investments.n***********************************************************************nThis article is presented by League Assets (www.league.ca). Visit League to get the Blue Book of Real Estate Syndication, a quick read which will teach you what you need to know about REITs.n