Real estate as an investment

In Canada, we have a great opportunity to grow money in a tax-deferred RRSP. You still end up paying tax eventually, but it is a great way to avoid paying taxes in your prime earning years.

Tax-free investments are a little harder to find. One of the most obvious is your principle residence. According to current tax law in Canada, any appreciation in value (capital gain) on the home that you live in remains tax-free. (If you're investing in multiple non-principle properties, the cost of carrying those is often tax-deductible so check with your accountant about the details.)

Here's a scenario that illustrates the potential power of a real estate investment: a home today costs $300,000. Given that prices tend to rise 5 percent per year on average, that same home could cost $315,000 a year from now. Today you're waffling: is it worth putting 5 percent down and grabbing the home for $15,000 and financing the rest? Ignoring the cost of CMHC premiums on the high ratio mortgage for a moment, you're looking at an investment: $15,000 to make $15,000 on paper. If you cashed out (which you wouldn't do because of the transaction costs), it's like doubling your money. If you waffled and waited: your $15,000 was sitting in a taxable investment somewhere, ready to use. So you earned interest on it, but that interest was taxed. Maybe you made $400 or so out the other end. That's a $14,600 difference over one year: plenty to justify a CMHC premium.

Now, there's no guarantee. Tax laws could change. The real estate market is cyclical. But in 1000 years of history, the prices of real estate have doubled every 20 years. That's where we get the 5% per year average increase from. Different areas are subject to different appreciation and depreciation. Some geographic areas are in rapid and distressing decline right now. Elliot Lake, Ontario, when the uranium mines shut down, went into a tailspin. It has since re-imagined itself as a retirement fishing town. Here in York Region, things have been relatively prosperous. Magna's shutdown was a blow, but we seem to be recovering well -- and the local economy has proven diverse enough to weather many economic storms.

My point is that no investment is utterly risk-free. In fact, the most lucrative ones tend to be the riskiest. As investments go, real estate is, in my opinion, as high-yield, low-risk as anything else out there.