Reasons Not to Invest in Real Estate

By Dan Barton

Bankrupt companies are leaving many Canadians without the retirement security they are counting on. In April 2003 Air Canada sought bankruptcy protection, citing mounting losses and a $1.3-billion shortfall in its pension fund. In November 2004 a study showed that 60 per cent of Canadian pension plans don’t have enough money in them. If the company goes bankrupt before the fund can get paid up, its employees, the people at the end of their working lives, are the ones who pay the price.

From 2020 to 2030, when older baby boomers will be 64 to 74, America’s elderly are projected to face an income shortfall of at least $400 billion, including at least $45 billion in 2030 alone.

The purpose of this special report is to bring you face to face with the facts that lie ahead for the remainder of our financial lives. This is not meant to be ‘Doom & Gloom’ information; however there are many statistics that prove everything is not as brilliant as it has been reported to be.

A study completed in 2001 revealed that more than 300,000 Canadians 65 years of age and older are still working. 57 per cent were between the ages 65-69 and 17 per cent were 75 years of age or older. So my question to you is not when do you plan to retire, but more importantly, how do you plan to retire?

By understanding the underlying fundamentals you can make an educated decision on what to do with your money. By being fully educated about what really drives markets, we can make informed decisions about how to invest our money, rather than just blindly investing. Let’s take an educated look…

Reading through the morning paper we briefly notice some headlines. “Interest Rates Skyrocket Over Night!” one reads. We read further and notice that the Bank of Canada has just raised interest rates another 25 basis points. What does this really mean? For uninformed individuals you may hear comments such as “sure glad I’m not in the real estate game right now! Did you see what happened with interest rates?” Or “the bubble is going to burst! Get out!” Why are these uninformed responses? First of all, a 25 basis point increase is not exactly skyrocketing. To prove this, let’s look to the numbers for hard facts.

Take a loan for $100,000 at 5% amortized over a 25 year period. For this loan we have a monthly payment of $584.59. If the rate goes up.25% to 5.25% we now have a payment of $599.25. That’s only a $14.66 increase on our monthly payment, which is hardly skyrocketing.

Mortgage payments aren’t the only thing affected by the rise in prime rates. The rise in interest rates come hand-in-hand with inflation and appreciation of real estate. This ultimately means that you are building up substantial equity in your property.

This release is named ‘Reasons Not to Invest in Real Estate’ with the purpose being to educate you that the headlines aren’t always true. You need to take a deeper look at what the article is communicating.

A study commissioned by TD Waterhouse found that two-thirds of people polled who have not retired are stressed-out about retirement investing, mainly because of uncertainty or a lack of money. But of the remaining third, the ones who said they weren’t stressed said they planned to be working past the traditional retirement age of 65.

So if we could educate people about how to become a sophisticated investor, I believe we would help reduce their uncertainty and lack of money, at which point these people would enjoy the retirement they deserve.

As you may well be aware, real estate has proven itself over time to be the primary choice of the wealthy for investing their money. This is how 90% of the wealthy got to where they are. Why, then, is there a resistance from people to invest in this way? The fact is, real estate could prove to be the path of least resistance for retirement.

No place in Canada demonstrates how serious the retirement problem has become better than Hamilton, Ont. Here alone from 1999 to 2004, more than half a dozen companies went bankrupt with under-funded plans. Hundreds of people who lost their jobs lost much of their pensions, too, and its not just the small players at risk. Stelco, one of the largest steel companies in North America, is currently in bankruptcy protection. In fact, the pension plan at Stelco’s Hamilton plant is short a staggering $660 million. The pension plans of 11,000 people in Hamilton alone hang in the balance.

Some economists say an increase in interest rates or a hike in the stock market could help many Canadian funds get, if not in the black, closer to it, but any of that would come too late for the people who have already been left with little to show for a lifetime of work.

Many people now believe that pensions are a relic of the past. Pensions became widespread at a time when life expectancy was much lower than it is today. A company could afford to pay their former employees until they died, which was once shortly after retirement. Today older baby boomer women who reach 65 have at least a 25 percent chance of living to age 92, and at least a 10 percent chance of living to age 97. So now, the majority of corporations can’t afford to pay the pensions of people who are expected to live to their mid 80’s or longer!

Many Baby Boomers understand that they won’t be able to retire at 65. Some of the more optimistic ones say they will just work until they can’t possibly work any longer. But this isn’t an intelligent plan, as 25 percent of those older than 65 are physically disabled, whether permanently or temporarily!

A plausible solution is to increase your financial intelligence and to generate cash flow from wise investments that make money regardless the state of the economy. One option is to become a real estate investor. To do this one must understand the underlying fundamentals about what drives a market. This will enable us to invest with comfort and minimal risk.

To invest in real estate, many of us must take action outside of our daily ‘comfort zone.’ Real estate investors only account for, at most, four per cent of the total real estate purchases. This means that out of every 100 houses sold there are only four people who are buying properties for investment purposes.

This statistic reveals that most people are either not interested in investing in real estate or would prefer to stay in their ‘comfort zone’ regardless of the financial consequences. I believe the latter rings a strong truth for many people.

Most of us are aware that when purchasing electronics from a store there is most likely a newer model is sitting in the storage room. Due to rapid and major technological advances, the world is now moving at a faster pace than ever before. We must realize and become conscious of the fact that what has worked in the past, such as retirement plans and pension funds, are no longer a secure solution for our retirement.

Change scares many people. This is why it is critical that we always remember to distance ourselves from those who do not understand the underlying fundamentals and instead surround ourselves with people who understand that change is inevitable.

By taking a diligent look at market fundamentals paired with strategic actions that are perhaps out of our comfort zone, we are better able to take control of our financial independence.

Taking a deeper look at how supply and demand affect real estate prices will reveal some fundamentals we need to look at. For example, a record number of people flooded into Alberta from October through December 2005, boosting the population by 25,100 or 0.76 per cent to 3.3 million, the strongest growth ever for the final quarter of any year, and well above the 0.14 per cent growth for the country as a whole. With an influx of people this extreme we are able forecast a shortage in housing supply while demand remains high.

No market in Canada demonstrates a better gap in supply versus demand than Vancouver’s high-rise condo market. Here alone in August 2006, the demand for high-rise condos was 4,700 units. Over the following 24 months, developers plan to build another 13,300 units. This is almost triple the current demand, and reveals a possible oversupply of units.

In contrast, growth in Alberta’s population was more than five times the national average through the final quarter of 2005. Its robust economy lured thousands of Canadians from other provinces and territories, seven of which actually saw their populations shrink.

This strong migration is a key source of housing demand. In 2005, BC recorded a net gain of 4,527 people from other provinces. While the figure is lower than the level recorded in 2004, it is a significant achievement given the strong pull from Alberta that gained 42,000 people from the rest of Canada.

Driven by soaring demand and limited inventory, house prices in Calgary surged more than 50 per cent from the second quarter of 2005 to 2006. Now with vacancy rates nearing zero, renters fortunate enough to already have a home brace themselves for rent hikes.

The population explosion in Alberta is due to a major shortage of skilled workers and an overabundance of well paying jobs. A government report released in June 2006 stated that Alberta will need 86,000 more workers over the next decade to deal with its acute shortage of workers. Within the next decade, it is predicted that the oil sands of Alberta will generate over 100,000 new jobs and billions of dollars in royalties and taxes to various levels of government, not to mention billions more in dividends to investors.

The shortage of rental units in Alberta shown by this tremendously low vacancy rate, low unemployment and high demand for housing, ultimately leads toward several predictable outcomes in the market. A sharp increase in property values, higher construction costs which in turn leads to an increase in

re-sale house prices, and, very importantly for the investor, ever increasing rents for their properties.

On a daily basis we hear so many Reasons Not to Invest in Real Estate:

“I’m extremely busy & I don’t have the time”
“I can’t be bothered to deal with tenant issues”
“I’ll get rich some other way – like the lottery”
“I’ll do it – tomorrow”
“Interest rates are rising and this bubble is about to burst”

The point is this: these are not reasons, but excuses. Excuses allow us to come up with justifications which support our underlying motive, which subconsciously, is to stay inside our comfort zone and away from change. Our subconscious exists to protect us; however the very component that is working on protecting us is actually destroying our chances at financial independence.

The time to focus on investing is now, even as the clock ticks ominously away. For retirees suffering from depleting pension funds, real estate investing is a small step when compared with the alternatives available. By investing in real estate, we look behind what the headlines are saying.

Ultimately you want to live your dream life, but you will never get there if you don’t commit to taking the actions that you need to take today, to get where you want to be tomorrow. Real Estate will get you there, you just need to commit and learn the fundamentals.

For Notes pertaining to this article please contact us or download the article in.pdf for free at http://www.oasisproperties.net/Report

Dan Barton is the CEO of Oasis Properties which provides turn-key solutions to invest in secure Canadian real estate. Oasis Properties is a property investment, acquisition and development company focused on creating investment opportunities through assets and new development of Real Estate.

Visit http://www.oasisproperties.net to request an information package or for more information with regards to the services we offer.

Add a complete structure, as well as the equivalent of an entire support network to your real estate business with Dan Barton’s ’90 Day’s to Real Estate Prosperity’. Contact us now to get your hands on this amazing program to skyrocket you to success!

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