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Top 10 Reasons Why Most People Don't Invest in Real Estate

Written by: Dan Barton

Article Overview: During these sometime stressful economic times, many people are currently experiencing massive uncertainty about their financial situation and don’t know what to do about it, or how to fix it. Diversifying in mutual funds is often recommended by top analysts when the market is sluggish. However, as stated throughout ‘Top 10 Reasons Why Most People Don’t Invest in Real Estate’ which is backed up with statistics and figures to support ist findings, investing in mutual funds may not be in your best interest. In fact, it could lead to a rapidly depleting retirement fund. Inflation can quickly eat into your investment capital if it’s not invested in the right vehicle or produ The ‘Top 10 Reasons Why Most People Don’t Invest in Real Estate’ report details where in the world inflation is quickly eating into people’s life necessities.

Top 10 Reasons Why Most People Don't Invest in Real Estate

What Everyone Thought was a Sound Investment

In August 2000, former NYSE ticker symbol ENE prices hit a high of $90. At this point the company executives, who possessed inside information on hidden losses, began to sell their stock. At this same time, the general public and investors were told to buy the stock. Investors were told that the stock would continue to climb until it reached possibly the $130 to $140 range, while secretly the executives began unloading their own shares.
As they sold their shares, the price began to drop. Investors were told to continue buying stock or hold steady if they already owned stocks because the price would rebound in the near future. Executives would often issue statements or make a token appearance to calm investors and assure them that the company was headed in the right direction. All seemed well on the investment front... for a short time.

By August 15, 2001, the stock price had fallen to $42. Many investors and financial planners still trusted and believed that this stock would rule the market place. They continued to buy or hold their stock and consequently lost more and more money every day. As October 2001 closed, the stock had fallen to $15. Many saw this as a great opportunity to buy stock because of what executives had been telling the media. Sadly, their trust and optimism proved to be greatly misplaced.

On November 28, 2001, news of growing problems, including the millions of dollars in losses the top executives had been hiding, went public about 10:30 that morning and the stock price soon fell to below one dollar. Surprisingly on November 21, 2001, one week before this collapse, 95 percent of analysts still recommended Enron as a good buy.
This situation, and others like it, created a new worldwide phenomenon, the likes of which had never before been seen. Younger generations were opting out of pensions due to mistrust. However, this seemed to be more of a ‘taboo’ subject than something people wanted to get out and take action towards fixing.

Around the world today, bankrupt companies with severely depleted and underfunded pension funds are leaving many people who are on the brink of retirement without the retirement security they were counting on. This is a fact that can be illustrated through several examples:

Ford Motors stated that its U.S. pension fund was underfunded by $7.3 billion at the end of 2002 while its overall worldwide pension under-funding totalled $14.5 billion. Its U.S. pension funds had a negative return of 9.7 percent in 2002 as U.S. stock markets suffered their third straight year of decline.

In April 2003, Air Canada sought bankruptcy protection, citing mounting losses and a staggering $1.3 billion shortfall in its pension fund.

A surprising study commissioned in 2005 by the UK based Brewin Dolphin, a highly respected Investment Management company, saw that Britons are expecting a 30 percent deficit in their pension funds by the time they retire. If people’s worst fears are realised, pensioners will be £159 billion worse off than they anticipated.

In March 2006, the U.S. Labour Department investigated Northwest Airlines as it had systematically short-changed its employee pension fund over three years, then avoided having to make a $65 million repayment to the fund by filing for bankruptcy protection just one day before the payment was due. The investigators traced back steps and found the pension fund's shortfall was really $5.8 billion.

In April 2008, the Ontario Teachers' Pension Plan, the provincial government and the federation representing 278,000 active and retired teachers were faced with a daunting shortfall of $12.7 billion between assets and liabilities. In 2007, the fund paid out $4 billion in benefits while receiving only $2.1 billion in contributions from active teachers and employers.

In mid 2008, GM faced a potential deficiency of over $4.9 billion, or the equivalent of about $112,000 per plan member. This shortfall was about $1 billion more than in 2004 and five times the shortfall they had estimated as of the year 2000. This compares with a 9.3 percent shortfall at Chrysler as of May 2007. And that’s not the end of the story. Around the world people seek perceived security from the companies they work for and their respective financial advisors or banks, which may or may not have their best interests in mind.

This mindset may have worked in the past but is not realistic today. Now is the time to take back control and responsibility of your own financial future. It’s time to stop relying on others to take care of you and your future. It’s your responsibility to find a sophisticated team who has your best interests in mind - not theirs.

In 2003, an Asian Study showed that at least 70 percent of Japanese Corporate pensions funds do not have enough reserves set aside to make benefit payments according to the Pension Fund Association (PFA). In 2004, another study showed that 60 percent of Canadian pension plans don’t have enough money in them to pay out their obligations to their retirees. And according to an independent study in 2004, 81 percent of U.S. private corporate pension funds are underfunded. If the company goes bankrupt before the fund becomes paid up, its employees, the people at the end of their working lives, are the ones who pay the price.

There seems to be little relief in sight. In the U.S., excluding federal workers, more than 14 million public servants and 6 million retirees are owed a staggering $2.37 trillion by more than 2,000 different states, cities, and agencies, according to Standard & Poor’s data, the highly renowned division of McGraw-Hill that publishes financial research and analysis on stocks and bonds. In 2003 alone, states and municipalities poured some $46.2 billion into these plans, according to the National Association of State Retirement Administrators, which is a 19 percent jump from the year before.

Are Analysts Playing Darts with Your Money?

Besides the very real fact of these depleting and underfunded pension fund accounts at many companies, additional considerations to take into account when planning for retirement are the inflationary costs of food, fuel and fertilizer. Yes, I said fertilizer as you will learn more about in the following paragraph.

From 2020 to 2030, when the 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. This shortfall will affect every aspect of these retirees’ lives including their ability to provide adequate shelter, food, clothing and the basic necessities of life for themselves in their so-called “golden years”.

Many people believe that just blindly turning their life savings over to their bank, financial institution or financial advisor will produce the results they so desperately need to live their desired lifestyle as they age. This seems to be a very popular view with very contrasting results as many of these institutions choose to pour client investment capital into well diversified mutual funds. However, one can find plenty of statistics that support the fact that approximately 75 to 80 percent of mutual funds under-perform the stock market returns in a typical year. Of course there is no such thing as a typical year and the real performance of funds varies greatly.

The average mutual fund return is 2 percent less than the average stock market return, yet despite this fact there are currently over $21 trillion dollars invested in mutual funds worldwide. In Stocks for the Long Run, Wharton School finance professor Jeremy Siegel shows that the actual percentage of mutual funds to outperform the S&P 500 has varied between 10% and 85% in individual years between 1972 and 2000. Nevertheless, he notes, between 1982 and 2000, there have been only three years in which more than half of mutual funds have beaten the Wilshire 5000, an unmanaged index which includes all publicly traded stocks headquartered in the U.S. and holds over 7,000 stocks.

Mind you, even the most professional stock traders have trouble predicting such a volatile market as demonstrated by a Swedish newspaper that gave $1,250 each to five stock analysts and a chimpanzee named Ola. Their goal was to test who could make the most money on the market in a one month period. Ola the chimp, who made his choice of purchases by simply throwing darts at a board containing the names of companies listed on the Stockholm exchange, won the competition. No, he is not for hire.

In addition to the general less-than-stellar performance of most mutual funds, sadly, if you’re a Canadian, your mutual fund fees are the highest in the developed world, as calculated below. The average Management Expense Ratio (MER) fee charged by a Canadian fund is 1.97 percent, the Total Expense Ratio (TER) is 2.68 percent, and the “total shareholder charges” (taking into account front-end or back-end loads) is 4.66 percent. Taking into account these same calculations, the average American fund fee is 1.42 percent.

Over a period of 25 years, if Canadian and American mutual fund returns were the same before fees (let’s assume they are 10 percent), an initial investment of $1,000 would grow to $7,800 in an American fund but only $5,800 in a Canadian fund. The average Canadian investor can lose nearly 40 percent of their profit in fees over a 20-year period. A mere 14 percent of Canadian equity funds outperformed the S&P/TSX index and 25 percent of U.S. equity funds outperformed the S&P 500 index over a five year period.

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 a ‘Doom & Gloom’ report; however, there are many statistics that prove everything is not as brilliant as it may have been reported to be. Ideally the investment companies and pension fund holders would change their ways, taking steps to ensure that the holdings of their investors are wisely managed. However, this is highly unlikely, so the mentality of you, the investor, needs to change. Bottom line? People need to start taking responsibility for their own investment portfolios and create a team that will help them make wise choices to achieve their retirement goals.

No place in Canada demonstrates how serious the retirement problem has become better than Hamilton, Ontario, where from 1999 to 2004, more than half a dozen companies went bankrupt with under-funded plans. Hundreds of people who lost their jobs also lost much of their pensions, and it’s 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 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, then 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. At one time a company could afford to pay their former employees until they died, which usually happened shortly after their 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. Heaven forbid you manage to live to 85 or older!

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 will become physically disabled, whether permanently or temporarily!

In addition to underfunded pension plans, there is a major crisis in the rising cost of living, namely, as mentioned earlier, in the costs of food, fuel, and fertilizer. These increases are taking a substantial, and growing, chunk out of all household incomes.

Back from the mid-1980’s to September 2003, the inflation-adjusted price of a barrel of crude oil was generally under $25 per barrel. During 2004, the price rose above $40, and then $50. A series of events led the price to exceed $60 by August 11, 2005, and then briefly exceed $75 in the middle of 2006. Prices then dropped back to $60 per barrel by the early part of 2007 before rising steeply again to $92 per barrel by October 2007, and then in January to a new record high of $99.29 per barrel.

Throughout the first half of 2008, oil regularly reached record high prices. On February 29, 2008, oil prices peaked at $103.05 per barrel, and reached $110.20 on March 12, 2008, the sixth record high in seven trading days. Prices on June 27, 2008 touched $141.71 per barrel, amid Libya's threat to cut output, and OPEC's president predicted prices may reach $170 by the summer of 2008. The projection costs of oil are very unpredictable among all the so-called experts. Goldman Sachs released a report stating that we may reach a high of $150 to $200, while others say the price will drop back down to a sustainable price of $70 a barrel within the next year. Crude oil has become one of the most volatile commodities on the marketplace. Around the world, oil companies are investing billions of dollars in new projects.
If we are looking to invest in places that have what the world needs, a good question to ask is where is oil readily available for extraction? Taking a look around the world, Saudi Arabia holds 20 percent of the usable oil, yet in recent years questions have arisen about the provability of these reserves. Canada comes in at number 2 on the list with 13 percent of the usable oil, much of which is stored in the valuable Athabasca oil sands in Alberta, which, surprisingly, have over 400 years of worldwide supply available at current production rates. There is presently $125 billion worth of new construction being planned here, which, when combined with operating expenses, adds up to a whopping $215 billion over the next five years. This level of activity will in turn create tens of thousands of new jobs in the region. These numbers are so surprising that in August of 2008, they attracted enough attention that Warren Buffet and Bill Gates toured around the area. To put into perspective the magnitude of this investment capital, in May 2007 Microsoft was offering $50 billion for the buyout of Yahoo.

On July 11, 2008, the maximum oil price per barrel was reached, with a high of $147.02. Increasing oil costs sneakily trickle down and are continually passed on to the consumer, not only at the pump but also in most consumer products.

You can also find the frontlines of a global commodities boom by driving an hour east from Saskatoon, Canada to the world’s largest potash mine. Two massive, dome-covered warehouses, each about the size of a standard football field, stand empty on the mine site. “A decade ago there would have been a mountain of potash in here,” says Will Brandsema, the general manager of AMEC Edgineering.

In 2008, worldwide demand for the pinkish, chalk-like mineral has been so great that the potash suppliers can’t keep their warehouses full. In 2005, Canada was the largest producer of potash by providing almost one-fourth of the world share, followed by Russia and Belarus in Soligorsk, reports the British Geological Survey.

In the past four years, the price of potash, the basic ingredient in fertilizer, glass, and soap, has soared to nearly $1,000 per tonne from roughly $100, largely because of rising populations in China and India and a sudden appetite for high value, fertilizer-grown food throughout the world.

In June 2008, consumer prices were 3.1 percent higher than a year earlier, with food prices up 2.8 percent and gasoline prices up 26.9 percent over that time, according to Statistics Canada figures shown on July 2008. Homogenized milk was 6.1 percent higher over the previous year, while the cost of bread was up 18.4 percent, flour up 40.9 percent and macaroni up 45 percent. Chicken prices rose 4.6 percent over the year ending June, 2008, but prices of most other meats were down, with producers finding it hard to pass on additional costs. "We haven't been able to get proper cost through in the meats, which means that all sorts of farmers and ranchers are being driven out of business, which guarantees much higher meat prices next year," said Donald Coxe, global portfolio strategist at BMO Capital Markets. All these rising costs point to higher inflationary rates.

The Bank of Canada, however, has publically committed to continue to keep inflation between one and three percent, but despite its best efforts, it admits we’ll hit 4.3 percent by early next year. CIBC expects U.S. inflation to hit 6 percent by 2009. However, these are relatively safe inflation rates as they are nothing compared to those that the world’s poorest nations are experiencing.



Billion Dollar Note – Why Do They Need One?

Zimbabwe is a nation where inflation is completely out of control. They just released a 100 Billion dollar note due to their hyperinflation. The official inflation rate is 2.2 million percent; however, the unofficial rate, economists say, is closer to 12 million percent. This means that the price of everyday items including food, clothes, and gas doubles every week.

An article in the August 2008 edition of Macleans discussed how in Vietnam, where inflation recently topped 25 percent, builders are walking out on unfinished jobs because they can no longer afford construction materials. In Venezuela, where the inflation rate is now higher than 30 percent, a hapless government is encouraging consumers to haggle over prices in a desperate bid to keep them from rising. Meanwhile, in Argentina, which has had an on-again, off-again hyperinflation problem for decades, the unofficial rate has hit 25 percent. In Russia, it's at 15 percent. China, Saudi Arabia, and India are all heading north of 10 percent. In fact, when measured properly, according to The Economist, two-thirds of the world's population will soon suffer from double-digit inflation.

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

By understanding the underlying fundamentals of investing, 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 noticed some headlines: “Interest Rates Skyrocket Overnight!” one reads. We read further and notice that the bank has just raised interest rates another 25 basis points. What does this really mean? For uninformed individuals you may hear comments such as, “I’m 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 now!” 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 standard mortgage for $300,000 at 5 percent amortized over a 35 year period. We have a monthly payment of $1,504.27 for this loan. If the rate goes up .25 percent to 5.25 percent, we now have a payment of $1,551.29. That’s only a $47.02 increase on the monthly payment, which can hardly be considered as skyrocketing. It may be a good time to point out that if $50 will break your deal, its most likely not that homerun deal you were looking for in the first place.

Mortgage payments aren’t the only thing affected by the rise in interest rates. The rise in rates goes hand-in-hand with inflation of housing costs, which affects other areas such as rent and, indirectly, the appreciation of real estate. Rapid inflation will ultimately mean that you are building up substantial equity in your property. However, high inflation is typically what sparks the rise of interest rates in the first place, ultimately creating a high interest real estate market, which in turn pushes buyers out of the market all together. Once this occurs, the demand for rental housing increases, causing an increase in the cost of renting, which in turn causes the price of housing to also increase. It’s somewhat of a vicious circle.

This report is named ‘Top 10 Reasons Why Most People Don’t Invest in Real Estate’ with the purpose being to educate you that the headlines aren’t always true and can sometimes be misleading. It’s important to take a deeper look at what an article or what someone is communicating to you really means.

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.

If people were willing to get educated about how to become a sophisticated investor, I believe this would help reduce their uncertainty and lack of money, at which point these people would enjoy the retirement they deserve.

Pension funds may or may not come around; however, one thing that is certain is that as long as people are on the planet, they will strive to have a roof over their heads, clothes on their backs, and food in their bellies. Creation of these commodities takes energy resources. An intelligent investment conclusion would be to invest in what the world population needs to survive, in addition to investing in a location that provides these needs in a specific geographic area.

As of July 2008, the world's population was estimated to be just over 6.684 billion. This is in line with the United Nation’s population projections, and this figure continues to grow at rates that were unprecedented before the 20th century. The world's population on its current growth trajectory is expected to reach a staggering 9 billion by the year 2042.

Most of the world’s population trades their labour, talent or time for a compensation of wage. Typically, higher wages in a certain area or location will draw a large percentage of a population to that area. The higher wages are often sparked by a lack of people available to work, forcing employers to pay more to attract employees. A robust economy in one particular spot may lure thousands of workers from other parts of the world, which in the past, has actually resulted in a shrinking of the population in other areas. A large influx of workers and people creates a strong demand for housing or real estate, and if people are making decent wages, this will allow them to spend more on housing. Thus, jobs and increasingly higher incomes fuel a housing demand and an increase in real estate prices is underway. According to one of E. G. Ravenstein's laws of migration created in 1885, “Migration increases in volume as industries and commerce develop and transport improves, and the major direction of movement is from agricultural areas to centers of industry and commerce.”

McDonalds© in the Real Estate Game?

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. Frankly, real estate is how so many of the wealthy got to where they are in the first place. According to the 19th list of “The World’s Richest People” by Forbes magazine, the annual list of the world’s billionaires, over 10 percent, or 64 billionaires, made their fortune in diversified industries and investments that included significant holdings in real estate. Why, then, is there a resistance from people to invest in this proven winner? The fact of the matter is real estate could prove to be the path of least resistance in which to cement a secure retirement.

In 1960, there were only 200 of what would become one of the most widely known brands in the world across America. A rapid expansion fuelled by low franchising fees, Ray Kroc had created one of the most compelling systems of all time, but he was barely turning a profit. Ultimately, it was Ray’s decision to use real estate as a financial lever that made McDonald's a viable operation. In 1956, Kroc set up the Franchise Realty Corporation, buying up tracts of land and acting as a landlord to eager franchisees. With this step, in a short period of time, the real estate operation became a high-margin contributor to McDonald's bottom line and began to generate real income, and the company took off. As Kroc noted, "This was the beginning of real income for McDonald's."

In the early 1970’s, Kroc began his career at his father's company and initially concentrated on his father's preferred field of middle-class rental housing. While he was still in college, one of his first projects was the revitalization of the foreclosed Swifton Village apartment complex in Ohio, turning a 1200 unit complex with a 66 percent vacancy rate to 100 percent occupancy within a year. Jumping ahead to 2007, Forbes published its list of America's wealthiest people and Donald Trump held 117th place out of 400 with what Forbes described as a $3.0 billion fortune, most of which is held in tangible real estate.

Donald Bren has also been recognized as one of the wealthiest real estate developers in the US with an estimated net worth of $13 billion. Others that have made the billionaire list include Samuel Zell who bought the Los Angeles Times, and Mortimer Zuckerman, the long time owner of the New York Daily News, all of whom seem pretty much immune to the housing, mortgage, and credit crisis that has recently captured the attention of many Americans and made its way into the conscious of the rest of the world.

A subprime mortgage is not a mortgage with a great interest rate; it actually refers to the amount of risk the lender or bank is taking by lending money to a borrower. It’s important to note that this product was created through irrational and sometimes unethical lending standards; the lender charged exorbitant lending fees and interest rates far higher than the borrower could financially take on, which, along with hidden terms and conditions, frequently led to default, seizure of collateral, and foreclosure. A subprime mortgage is generally due to one or a combination of factors, including credit status of the borrower, income and job history, and income to mortgage payment ratio.

As a result of listening to hyped up media reports that are also being vocalized through your coworkers and friends, it’s easy to start to believe everything you hear. However, if you’re looking at investing in real estate, this ‘crisis’ might have created the best opportunity for you in years!

To figure out the truth, it’s important to take it upon yourself to separate fact from fiction. In early 2008, papers and media were swamped with information about how many Americans’ homes were being taken away from them and how people were sending in their keys to the bank, etc. We hear these stories and automatically think that this crisis will spread to our part of the world. A study completed during this same time by GE Capital, a mortgage insurance company, found that a staggering 20.20 percent of all mortgages in the U.S. were of subprime nature. Much of the rest of the world never stooped to such low lending standards, however. In Australia, only 7.6 percent of its mortgages were of a subprime nature, giving this country the distinction of being the second largest country in the world with subprime lending habits. Ireland stands at 6.6 percent, UK at 6.4 percent, Spain at 5.7 percent, while Canada sits at a low of 3.6 percent due to lenders having higher standards for approving loans, making it tougher to borrow money in Canada compared to other parts of the world. This strictness results in less of a negative impact on the economy compared to areas of the world with the higher ratios for lending money.

So where do you get Started?

Learn, and Ask the Right Questions

Taking control of your financial future involves increasing your financial intelligence about investments, and learning how to generate sustainable cash flow from wise investments that make money regardless of the state of the economy. I suggest educating yourself through seminars, books, and articles such as this, about intelligently investing in the market or real estate. To do this properly, one must understand the underlying fundamentals about what drives a market and what to invest in, as well as what other people’s motives for helping them are. A great question to ask anyone who is helping you build your financial portfolio is, “How exactly do you get paid?” The best payment structure you can find is one where the person managing your portfolio gets paid in direct proportion to profits they create for you, and not before you reap any benefits. This will enable you to invest with comfort and minimal risk and have total control of your portfolio.

 

The Next Step? Making the Right Decision

To invest in anything on our own, many of us must take action outside of our daily ‘comfort zone.’ Real estate investors only account for, at most, four percent of the total real estate purchases. This means that out of every hundred 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 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, pension funds and mutual funds, is 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. Simply taking a deeper look at how supply and demand affect real estate prices will reveal some fundamentals we need to look at.

By looking closely at housing affordability, you can easily detect trends in a real estate market to determine which way prices may be going. Typically, 40 percent of one’s income going towards housing before provincial and municipal taxes is considered an affordable and sustainable housing market.

In Canada, these percentages have been substantiated by the Royal Bank of Canada (RBC) as they release a study each and every fiscal quarter on the current status of housing affordability. Also included in this study is the average income one would be required to possess in order to be able to afford an average home in a specified area. As stated above, it would certainly be advantageous to be buying in areas where the real estate was selling around or below the 40 percent mark.

In the summer of 2008, the average income needed in British Columbia to qualify for a mortgage on a standard home was $100,663 per year. However, the actual pay the average British Columbian took home was much less at $68,900. This in turn means many British Columbians are pushed out of the home ownership game because it is so far out of their reach financially, and if they did pursue the dream of homeownership, they would have very little disposable income left over for the other necessities of life. According to RBC, 57.93 percent of a British Columbian’s income before taxes is going towards home ownership. These unaffordable rates, over time, may possibly force sales to soften and listings to increase as buyers seek more affordable destinations elsewhere.

Comparing the above situation to the province of Alberta, which is less than an hour’s flight away, the average income an Albertan will take home is over $17,000 more than the average British Columbian, with the Albertan’s coming in at an annual average income of $86,000 per year. This higher income paired with less expensive homes make for a very lucrative buying opportunity. The average income needed to qualify for a mortgage on a home in Alberta is $78,062, substantially lower than the actual pay someone walks away with. According to RBC, Albertans spend 35.38 percent on housing before the appropriate taxes, leaving some substantial room for growth in real estate prices.

The substantial difference in cost of housing in Alberta is due to a major shortage of skilled workers and an overabundance of well paying jobs. Economists typically describe an unemployment rate of 4 percent or less as full employment - the economic condition when everyone who wishes to work at the going wage-rate for their type of labour is already employed. At 5 percent or less unemployment, the labour market is characterized as “tight.” In July 2008, Alberta’s unemployment rate was significantly below the Canadian national average of 6.1 percent, sitting at a very low 3.6 percent, while the U.S. was sitting at 5.7 percent - its highest level since 2004. In Alberta, new jobs and billions of dollars in royalties and taxes to various levels of government, not to mention billions more in dividends to investors, will fuel an ever increasing housing market for the next decade. However, in other parts of the world, signs are emerging of cooling European housing markets, with growth in prices moderating in most other countries. In Ireland and more recently the United Kingdom and Spain, prices have begun to fall. The International Monetary Fund (IMF) expects further declines in housing prices in these countries over 2008–2009. However, in Canada, the growth in housing prices is expected to moderate slightly, but not decline. “With few signs of excess supply at the national level, the growth in prices is expected to remain positive,” stated the Bank of Canada in the summer of 2008. There could be a shortage of one million skilled workers in Canada by 2020 if the current trends continue, according to the Bureau of Labor Statistics.
 

Top Ten Common Excuses

Leverage is one tool that many people use to get into home ownership despite our underlying subconscious hesitancy trying to take us out of the real investment game. This is a solution most people use to substantially increase returns and reduce the capital needed to get into home ownership, which seems to be one of the main objections of investing in real estate. Simply stated, many people cannot afford to pay cash for their homes so they utilize a mortgage from a bank. The bank often allows you to put less than 25 percent of the purchase price as a down payment on a home while they finance the rest. So if you are purchasing a home that costs $500,000, the bank will most likely lend you $375,000 or more if the property will be your personal residence. This would allow you to acquire this property for $125,000 out of your own personal investment funds. Let’s say, for example, that the average annual ROI is at a rate of 5 percent; you are most likely netting more than the average 5 percent due to leverage.

If the market then appreciates at the rate of 5 percent per annum, for example, you net this increase on the total value of your home. Your property would now be valued at $525,000, which means you have accrued $25,000 that year on your original investment of $125,000, a 20 percent return on your investment (ROI). This return is significantly higher than the market 5 percent we used in this example.

On a daily basis we hear so many reasons why not to invest in Real Estate, such as:

"I'm extremely busy and 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."

"This bubble is about to burst."

"I don’t have enough for a down payment."

"Real estate is too risky for me."

"The bank won’t lend me any money for a mortgage."

"I don’t know how."

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

All markets are living and breathing entities, which means they will fluctuate due to supply and demand. The key to ensure that you can sell your property at your expected price is to plan your exit strategy by paying close attention to economic pointers in the market place. It is important to make sure you buy in places that allow for future growth and that you are not relying solely on past performance.

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 and find out the ‘real’ story.

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 you where you want to be tomorrow. Real Estate will get you there - you just need to commit and learn the fundamentals.

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Article Tags: august 15, buying stock, collapse, company executives, financial planners, generations, investment front, mistrust, nyse ticker, optimism, pensions, right direction, short time, sound investment, stock investors, stock price, taboo subject, ticker symbol, top executives, worldwide phenomenon



Related Forum Posts
Re: No money Down real estate Webinar - I wish I could attend. I want to learn more about Real Estate investing although I have to have other priorities at the moment. Can you keep me updated about the next one though?
Re: Hi - Thanks guys! I have been helping Real Estate and Mortgage professionals generate leads from the Internet for 5 years now!. I'd be glad to exchange some ideas. Have a great day=)
Re: Hi All, - Welcome Aaron!! what type of Real Estate investing do you specialize in? in Toronto I am involved in purchasing properties at wholesale prices prior to the owners going into Foreclosure.
Re: Invest in Real Estate or Stocks? - You can consider investing in Real Estate Investment Trusts (REITs). Buy and sell shares like stocks so they are easy to buy and sell, diversify and management is included.
Here to Meet Great People! - Hi Matthew Ferry here! I am a life coach and also an entrepreneur. I work with people from all walks of life, Real Estate Agents/Brokers, Entrepreneurs, Businessmen. Great to be here in this forum! Looking forward to hear from you! Thanks!


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