How To Build Wealth Through Real Estate

How To Build Wealth Through Real Estate

Real estate has been proven to contribute significantly to individual and household wealth. This is because investing in a home can build wealth through equity and appreciation.

Equity represents the current value of the property minus any debts or liabilities. Appreciation means the growth of the property’s value over time. If you own your home, you benefit from increasing equity and appreciation by paying off your mortgage debt and holding onto (or living in) an asset that will become more valuable over the years.

This gives real estate a unique advantage over other types of investment vehicles, like stocks. Real estate offers stability, security, and control that investors can count on for long-term financial prosperity. Additionally, homeowners have a leg up over renters, who do not benefit from building wealth despite paying similarly pricey monthly housing bills.

Your Biggest Asset

For most Canadians, their home represents their most significant asset. According to Statistics Canada, real estate accounts for more than half of the average household wealth of Canadian families. For families under 45 years old, real estate makes up 80% to 90% of the average household wealth!

Studies have shown that families without real estate assets struggle to accumulate wealth, lagging far behind families who have invested in real estate. According to Statistics Canada, the average net worth of a rental household is roughly $260,000, whereas the average net worth of a homeowning household is $950,000 with a mortgage and $1.8 million without a mortgage.

When comparing changes to net worth since 2010, the wealth growth of Canadian homeowners has outpaced the wealth growth of Canadian renters by roughly four times. In fact, the amount that renters spend on housing costs (almost $3 out of every $10 of income) has increased to 8% more than what homeowners spend (just over $2 for every $10 of income) today.

This indicates how important home ownership is to accumulating wealth: real estate assets increase in value over time, and owning can be more cost-effective than renting in the long run.

Building Your Equity

Paying down a mortgage helps you build home equity. As the debt liability against your house goes down, the percentage of ownership you have in your home increases. You are essentially putting money into your pocket by paying off the mortgage loan principal.

For example, your home may be worth $1 million. If you were to sell your home shortly after you took out a mortgage to purchase it, while your mortgage loan would account for 80% of its value, you would only receive $200,000 equity or 20% of its worth. The rest of the funds would go to your mortgage lender to pay off the debt held against the property.

However, if you were to sell your $1 million home when your mortgage loan is closer to being paid off, accounting for only 20% of the home value, you would receive 80% of its worth, which is $800,000. This is because you have already paid your mortgage lender the majority of the mortgage loan principal through years of mortgage loan payments, increasing the equity you have in your home to 80%.

Eventually, you will pay off your entire mortgage loan principal and own 100% of your home equity or value, which itself increases the longer you hold onto the property.

If you are not a homeowner, the housing costs you pay monthly for rent will go directly into your landlord’s pocket, helping them build wealth or increase the equity in their property. This makes it much harder for you to accumulate wealth, which is why home ownership is critical for long-term financial success.

Passive Growth Through Market Appreciation

Over time, your home’s equity grows as the market raises all housing values. For the last few decades, we can see that the average price for a home in Vancouver has increased dramatically: in 1993, it was $206,490, while in 2023, it was $1,126,279. That represents an increase of almost $1 million in 30 years and an annual appreciation rate of nearly 6%.

If you have purchased a home in the past, you know that its value has slowly increased over several years. Even when prices dipped, the market recovered shortly afterward. For example, in 2017, the average price for a home in Toronto was $822,510. During the global financial crisis of 2018, the average price dipped to $787,842, but by the following year, it bounced back to nearly where it was before, to $819,153, and continued climbing upward. By 2020, the average price for a home in Toronto exceeded $1 million.

If you buy a home today, you can expect similar results. For example, if we take a more conservative rate of appreciation at 4%, a home purchased today for $600,000 can be anticipated to be worth $888,000 in 10 years, $1,080,000 in 15 years, and $1,315,000 in 20 years.

Guarding Against Inflation

The annual inflation rate in Canada for the last 30 years was 2.1%. This refers to the rate at which the purchasing power of your money is reduced over time as the price of everyday essentials, goods, and services goes up a little each year. Meanwhile, the annual appreciation rate for housing in Canada for the last 30 years was 5.8%. This means the value of your home increases each year due to circumstances in the market, such as supply and demand.

Of course, the rate of home appreciation can vary slightly based on neighbourhood, city, and timing, but it’s clear that real estate values easily outpace the rate of inflation. This is excellent news for homeowners as their investments are secure for the long term and will continue to grow. Meanwhile, other passive means of saving or investing — like putting your money into a savings account — may not even match the rate of inflation, which means they do not help build wealth. But as it has been proven over decades, buying and holding onto real estate means your investment will outpace inflation.

Key Takeaways

Owning a home helps build wealth in many ways. Equity grows as mortgage loans are paid off, real estate values are proven to increase over time, and housing naturally safeguards against inflation. Therefore, housing is critical for wealth-building, as without owning this essential part of your everyday life, you will miss out on setting up yourself and your loved ones for long-term financial stability.

Ready to invest in your future through homeownership? Contact Stan Stanchev at 604-202-1412 today. Since 1991, we have been guiding clients through the steps of buying, selling, and investing in real estate. Our support has helped countless clients achieve their ultimate financial goals.