Fallacy Of Real Estate

Dec 03, 2012 1 Comment by

Goldeneer has developed a hierarchy model to build wealth in order to simplify the wealth building ladder. This model is based on frugality, savings, investments, leverage and shows us that wealth cannot be achieved by skipping any previous foundation.

Fallacy of real estate
I shake my head when I hear well respected financial advisors comparing the return of real estate relative to other investment vehicles. I often hear advisors quoting a poor return of 2-6% on real estate and advising their clients to buy into investment funds with potentially higher returns than real estate.  These advisors tend to be found in well respected business newspapers where the advertisers are often financial institutions that want customers to hear advice to buy stocks, not real estate.

The fallacy comes from quoting the increase of the property value instead of the Return On Equity. Real estate ROE comes from three primary sources which are increase in property value, principal repayment and positive cashflow. In addition, leverage is achieved because any increase in value, principal payment and positive cash flow from tenants multiplies the ROE since the investment is only the down payment and not the entire value of the house. I get between 50% to 200% ROE on my real estate investments and would laugh at any financial advisor that suggests I sell my real estate in order to invest in stocks because my properties are expected to *only* increase in value 4-6% annually.

If real estate is to be compared to the stock market, all risks and benefits need to be evaluated instead of only comparing the capital increase.

Real Estate

About the author

Clara Cannes, the chief author from Goldeneer is a Canadian that works as a full time employee in the engineering field. Her passion is real estate, entrepreneurship and sustainability. Clara has finally reached financial independence in her late 20's and is on the path to a comfortable retirement by 35.

One Response to “Fallacy Of Real Estate”

  1. Veronica @ Pelican on Money says:

    Gotta be questioning everything. I’m writing a post tomorrow that echos your message. I’m interested in real estate investment but know nothing about it. Looking forward to reading your blog!