1) Real estate value is always appreciate.
For sure nearly all stuffs in this world appreciate in their pricing. Take a look for the price you pay for a burger sold today and 10 years back. How about the price you pay for a movie ticket? A cup of coffee in café? The only difference is the rate of appreciation. No matter what investment vehicle choice is, the ultimate goal is to beat the inflation rate. If price of burger appreciates 100% in 10 years time and a price of a cup of coffee appreciates same rate, the investment you made must exceed the rate. Otherwise, you are losing – meaning that your purchasing power is lost. While you could buy 100 burgers 10 years back (assuming a burger cost $1 then) with $ 100, today you only manage to buy 50 burgers (assuming a price of burger today is $ 2). If your investment gives you 50% return for the same duration, you are still losing the game. Why? You might ask, after all my $ 100 10 years back become $ 150 today. That’s the trick of the game: inflation gives you an illusion of wealth. Putting same example, a burger cost $ 2 today, how many burgers could you buy with $ 150 in today value? 75, exactly! 75 burgers! That means you lose out 25 burgers if you use the same amount and bought the burgers 10 years back.
Let me show you a real life example. A house bought 15 years ago with price tag $ 110,000. After adding all necessary expenses, let’s assume the cost of the house is $ 120,000. Today, if you decide to sell the house in a secondary market, the buyer will offer you $ 270,000. Wow! Sound good, because I gain $ 150,000 ($ 270,000 - $ 120,000). When you use financial calculator to count for the yield, you would find out it only gives you a mediocre return, with 5.56% yearly compounded return. How much you will get if you invest in another vehicle which gives you 12% annual compounded return for same period? $ 660,000!! Instead gaining $ 150,000, you could reap $ 540,000 ($ 660,000 - $ 120,000). See the difference?
People might argue that besides capital gain, a wonderful part of real estate investment is its rental income. Let’s examine it again with the mentioned example. The monthly rental today is $900. That means over the period of 15 years, the total rental income generated from this investment is $ 162,000 ($ 900 * 12 * 15).
Adding the capital gain of $ 150,000 with the total rental income, this means you will get $ 312,000 in total ($ 150,000 + $ 162,000), which translates into 6.58% annual compounded return. Bear in mind, for the sake of simplification, I already assume the rental income in higher end, which is fall in the later part of the period (In reality, the monthly rental is less than $ 900 15 years back). Not to forget is the calculation is based on the assumption that you purchased the house with cash, without financing. If you choose to put 10% down payment, the financing cost and other related costs would eat up most parts of your return, where the financing rate fluctuated around 6.5% to 10% over the period. Do not forget about the taxation effect. Depending on your income bracket, your rental income also constitutes your income tax. By adding this extra cost, your return on your real estate investment would be lower.The example shown here is a landed residential property and located 10 km from the city centre. The brokers always proclaim: “Location, Location, Location.” as a paramount importance in order to make a good investment, from the example, it seems not.
Do your maths and think it independently, is real estate really a good choice of investment to hedge against inflation? The conventional wisdom might true, might not, depend to the situation. When seeking opinion, choose the right candidate, not the interested parties. Like somebody saying: “Cheated once, shame on you; cheated twice, shame on me.”
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