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Is Commercial Real Estate A Good Investment?
For those wanting a steady return on their money, investment in property can be a sure bet. Suddenly, realty seemed like the path to instant wealth when the baby boomers started buying homes very actively in the 1980s. Since then, the real estate markets have fluctuated constantly. There have been times, as in the early 1990s, when house prices have gone down. However, if you look at the overall price of homes in your area over the last 10 years, in most cases, and depending on your region, prices have risen.
Where is the housing market headed? This is something that nobody can accurately predict. But even if house prices don't rise phenomenally, a home has two strong things going for it as an investment.
First, any capital gains on your principal residence are tax-free. If your house appreciates by 6 per cent, you get to keep every cent of your gains. Now 6 per cent may not sound like much, but in terms of how much you end up with, you'd have to earn as much as 12 per cent on a fixed-income investment such as a GIC to match that return, after tax.
Second, you don't have to come up with the full purchase price of the home in order to harness maximum leverage. The conventional mortgages require a down payment of 25 per cent of a house's appraised value. Where as the High Ratio Mortgage, requires only 5% down payment.
For example, if you buy a $200,000 home, you need to come up with about $50,000 for a conventional mortgage. If the home's value rises to $220,000, that's an increase of 10 per cent. But what's really happened is that you've made a $20,000 gain on a $50,000 investment. Your real gross return on your invested funds is around 40 per cent. But notice the word “gross”. Don't forget that your real return will be less.
Buying a home and having a mortgage can be considered a tremendously powerful forced savings program. During the purchasing process, seriously consider these points, as they could well work to your advantage.
Ian Raynor is a Realtor with Coldwell Banker Innovators Realty and currently has a number of commercial listings in Ontario. Oct/07. www.properties2discover.com
