most "investments" are speculation.

A common question from prospective investors who come to our seminars (and now webinars too), is about the difference between investment and speculation.

Speculation is...
You buy an asset that MUST go up in value to make money. Examples would be: gold, most non-dividend paying stocks, most mutual funds or ETFs, buying call or put options, flipping condos, expensive single family homes or condos, NFL franchises, diamonds, paintings, and antique cars.

Investment is...
What we do. We buy an asset with income, so that even in a flat or declining market you can make money with it. It's why our investment strategy is especially attractive to so many people in these uncertain economic times.

Let's take a look at some numbers that help explain how our investments are so radically different than the speculative nature of other "investment" options available to you.

Consider these apartment building investment scenarios, all based on one set of real world assumptions:

• 20% downpayment
• no positive cash-flow: (rent only covers mortgage and property maintenance)
• 10 year time frame
• 1st 5-year mortgage at 5%, 25 year-amortization
• 2nd 5-year mortgage at 5%, 20 year-amortization

Below is a written summary of investment scenario calculations. For the detailed investment scenario spreadsheet, click here.

Let's start with your asset retaining or increasing its value compared to your purchase price:

Scenario 1:
NO APPRECIATION IN VALUE
You have DOUBLED your money as renters will help pay the mortgage almost 30%!

Scenario 2:
20% INCREASE IN VALUE
Equal to less than 2% annually compounded, which is FAR below Canada's long term annual average of 5.6% for resale homes over the 25 year period between 1981-2006*. In this scenario you have TRIPLED your original investment.

Scenario 3:
30% INCREASE IN VALUE
About 2.6% annually compounded, well below Canada's long term average, as house prices double every 15 years in a normal economy. The value of your original investment is now at 355%.

Scenario 4:
40% INCREASE IN VALUE
STILL BELOW Canada's long term average, as house prices in Canada double every 15 years in a normal economy. In this scenario you have made 405% on your money, i.e. QUADRUPLED it!

Now let's look at scenarios where your asset's value actually decreases:

Scenario 1: 20% DECREASE IN VALUE
Even with a 20% market decrease in 10 years you will have lost no money! Your investment is now at 105% because the mortgage has been paid down. Wait 15 more years (assuming a 25 year amortization) and renters will help pay the mortgage down to zero and quadruple your money (you invested 20% on the original value of the house, which is now worth 80% of its original value).

Scenario 2: 50% DECREASE IN VALUE
With a 50% market DECREASE over 10 years renters will again at least still be helping pay down your mortgage, and if you wait 15 more years your mortgage will be zero and you make 150% on your money (from 20% to 50% of original property value).

WOW ... now that is what we call an investment!!

Of course, we appreciate and always look for potential equity upside, and usually get it in a healthy market over a longer period of time, especially with our Prestigious Value Chain of property management and building improvements. This is why we would not call what we do speculation; just common sense or prudent business.

Our goal is to provide you with an asset that allows you to sleep at night and collect enough (positive or zero) cash-flow to hold for 5, 10 or 25 years.

 

*Making Reasonable Assumptions...

Is it reasonable to assume in the current economic climate that real estate will continue to perform according to Canada's long term annual average of 5.6% for resale homes over the 25 year period between 1981-2006? We believe it is, considering that the time frame measured spans other major housing price corrections, as you can see from the chart below.