The Insane Effects of Compounding in Real Estate Investing

Ah yes, the compounding effect.  Penny pinch as much as you can during the best years of your life so your money can compound and you can live the high life in the nursing home.  Substitute that $2 roll of 3-ply toilet paper for a $1 roll of 2-ply and you'll be rolling in dough by the time you are 80! (or some variation of that).  You'll be the richest man or woman in the nursing home, strapped to your urine soaked bed, but at least you'll be able to buy whatever you please!

Anyone who has read any kind of personal finance blog EVER, since the beginning of time, surely has come across the idea of compounding your money over time to make you rich.  Therefore, we won't get into too much detail on that, but just want to stress the way compounding can supercharge your real estate investment without having to sacrifice too much today!

Nothing in this world ever comes easy and no one should ever pursue anything that could get them rich quick, as these schemes usually have high risk attached to them. But, investing in real estate can get you some pretty darned good returns which, compounded over time, can lead to life changing wealth.  We truly believe it to be fairly simple to achieve returns of 15-20% when you invest in real estate properly.  For comparison's sake, the S&P 500 stock market index has returned an average of 7.96% since 1957.  With real estate  you should be able to double your return over the stock market, and with less risk!

I would argue that the types of returns you can get in real estate are pretty damn good for a relatively low risk.  We are living proof of this with our real estate portfolio.  Despite the horrible, miserable last 5 years Calgary has experienced economically, we have returned an average of 15.5% annually on our Calgary real estate since we began investing in 2006.  Not bad, eh?  Of course there was some blood, sweat and tears involved, especially in the past 5 years, but 15.5% is still good!  Comparatively, our US portfolio has returned an average of 22.2%, which we believe is more consistent with long term return on investment average for real estate.

Getting back to compounding, you can imagine how quickly your money can double.  A $100,000 investment in real estate with a 15% return would double to $200,000 in just under 5 years compared to 9 years investing in the S&P 500 with 7.96% returns.  Think about how much faster that will take you to financial freedom!

Another major consideration in this comparison is cash flow.  When done correctly, real estate can return 5-10% cash on cash (cash flow earned as a percentage of original investment cash) vs the S&P which currently spins off an average of 2% in dividends.  For icing on the cake, real estate investors can depreciate the property so essentially they can defer tax on this cash to when they sell the property AND they would pay the tax at a lower capital gains rate vs dividends on stocks which are taxed at a higher rate.  It's a lot easier to keep the good times rolling with compounding if the taxman isn't asking you for a chunk of that money every year.

Thanks to real estate you won't have to worry about sacrificing your 3-ply TP!

1 thought on “The Insane Effects of Compounding in Real Estate Investing”

  1. Great article on the benefits of Real Estate investment vs stock market. Especially the cash flow component and benefits of tax deferral!

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