June 17, 2010, 6:09 am

Why Real Estate May Not Be The Greatest Investment

by: The Financial Blogger    Category: Alternative Income,Properties
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I could be a pompous punk and brag about my real estate investment I made in college—but I won’t. Why not? Because it wasn’t the greatest decision of my financial career. I’m proud of my decision to purchase a condo at a young age, but I wish I did just a little (okay, maybe lots!) more research. I hope that all of you aspiring real estate investors peruse this post before you transfer your hard earned savings to a mortgage down payment.

Many more costs than you will originally think of.

We all know that you have to put aside money for your mortgage down payment. Unfortunately for all of us, this is just the beginning of the plethora of costs! These are a few additional costs you need to consider with a real estate investment:

  1. I.            Lawyer fees- You’re looking at least another $1,000.
  2. II.            Closing costs- You don’t even want to know what’s included in this.
  3. III.            Land transfer tax- This depends on where you live, but yes it’s another potential cost.
  4. IV.            Maintenance fees- You will need to pay monthly maintenance fees for your condo investment. God bless you if the condo has a pool and a gym.
  5. V.            Property tax- You may own the property, but the government will still charge you taxes.

Not the greatest investment.

Real estate isn’t really the greatest investment. Let me rephrase, real estate can a highly lucrative investment—but not always! There are many investment options out there. Let me share some other investment ideas with you guys that could be more beneficial than real estate:

  1. Savings account. You can put your savings into a high interest savings account. You can sleep comfortably at night time knowing that your money is slowly growing. Not the sexiest investment option, but definitely the safest.
  2. Startup Business. You can invest the money into your new side business. The thousands of dollars could be used to purchase equipment, register your business, market your services, or even to help you survive during the lean times. This could potentially be riskier than a real estate investment. Please do all of the necessary research before you decide to start a business.
  3. Education. The money could be used to take evening courses at your local college. You can improve your current skills or possibly learn a whole new skill set. This investment isn’t the sexiest either, but you can’t go wrong investing in yourself.

Plenty of risk involved.

You really never know what’s going to happen. One bad shooting, one negative consumer housing report, or even a shift in social trends, and the area your property is located in decreases in value. Oh did I mention the potential of a housing bubble burst?

I took the risk of buying a condo that is just outside of downtown Toronto in an area that’s currently not in the greatest condition. I can live with this risk because I’m a young, single dude. Not everyone can handle this type of risk. Where does your risk tolerance stand? Can you handle losing some money upfront? Can you wait before you “cash out?”

I hope I didn’t scare anyone away from a potential real estate investment. Do any of you guys have stories you would like to share on the topic?

Author MD

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Comments

by: The Financial Blogger | June 17th, 2010 (6:22 am)

I actually lost money on my first home when I sold it.

I was quite young when I bought it (24) and I didn’t think about my needs (having 3 bedrooms on the same floor because I wanted to have more than 1 kids). So I had to put my house for sale 7 months after I bought it.

I was able to resell the house about 10K more than my purchase price. However, all the fees (lawyer, real estate agent, moving, taxes) ate more than my 10K profit…

So it’s not right that you are always making money with properties!

by: 2Hirondelles | June 17th, 2010 (8:08 am)

Another consideration for many with college-age children is rent vs. buy for 4 years. Are they likely to perhaps come out ahead by buying a condo for the kid(s) rather than paying for the apartment/residence? Might there be a Master’s or PhD or sibling following?

A rule of thumb I have heard is that you need to keep a house 5 years to make money, all costs considered.

Real estate also means know your market. Everyone talks about a housing bubble. Here in Ottawa, we didn’t see one the last time prices went down in Toronto, and I doubt we will see one if it happens again. At the same time, we have not seen the same rate of increase in prices, either. I suspect we will continue to see steady growth, although somewhat less as interest rates rise.

by: The Financial Blogger | June 17th, 2010 (9:56 am)

@2Hirondelles,

We didn’t feel the housing price drop in Montreal either. In fact, condo’s are higher than ever!

I wish I had enough money to buy a duplex or triplex for my kids when they go to University (in 17-18 years). This would be awesome experience to have them managing a rental property while being at school.

Very good points, I think the costs are too often overlooked and can have a major impact on the return…

Also making 20K after all costs on a 250K investment after 4 years is actually not that good, it’s important to put things in perspective.

As a real estate investor with a few properties under my belt, this post reminds of why the mortgage rules have changed to require 20% down on investment properties. I am of the opinion that an individual’s personal residence is not an investment but a savings account only because you are forced to pay down the principle and can’t spend the equity that’s built into it right away. Which for most people these days is a good thing! When I buy real estate as an investment, I am typically looking at buying that cash flows today when I buy, much like buying a stock that pays a dividend. It pays for itself. Both of which you need to do your research to find out what the long term fundamentals are before investing in them and more importantly is when are you going to sell them. I typically buy properties with the notion that I will be holding them for 15 or 20 years. With that mindset I really need to look at the long term fundamentals of the area/neighbourhood. There are pro’s and con’s to both RE and stocks, but speculating on the pricing going up is … well, speculation. Especially when buying a property when the expense of purchasing and selling is expensive. Once in, you’re in for the long term, not to flip quick!

@TK – I see your point but at the same time, real estate is a good place to invest, I don’t think that should be ignored. Just need to be smart about it. All of these points are good but a friend of mine is still able to make tons by buying old properties and restoring everything.

I hope it works, I own 3 properties now and have no life.

Pete

by: The Financial Blogger | June 17th, 2010 (11:29 am)

@Pete,

how many doors? is it that time consuming?

I’ve bought and sold 8 properties and only lost a little on the first one because I was not smart and panicked. On the others the returns were over 100% each, each in 3 years or less. The idea was simple, buy in a rental in a city that I think is going to increase over the next several years, collect rent, then sell when I think I want to go to the next city. If you’re scared of fluctuations, go in with more than one person and spread the risk.

Real estate is a business, just like your suggestion to start a side business. Except real estate doesn’t take very much time. Hire someone to manage the place and it’s true passive income. You just have to run the numbers.

The driver is the huge leverage. And it is quite safe, as long as you aren’t foolish and buy a money-losing property. A cash-flow positive real estate deal will almost certainly return at least 10% and will be safe (you model the safety into the #s)

Another good thing is that you can get the use of equity through increasing mortgage as the property appreciates.

I agree with you about all the bloodsuckers involved in a real estate deal.

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by: 2Hirondelles | June 18th, 2010 (8:57 am)

@intelligent speculator
I agree, $20K on a $250K investment over 4 years is not great, except that to own a $250K condo, you didn’t invest $250K, you invested any costs over and above what you would have been paying for housing for your kids to go to school in another city for four years: rent/residence costs would have just been thrown out the window.

@TFB if you had planned on paying for the kids’ educations, start ‘training’ them now to buy into your plan. It’s possible the right semi- or duplex purchase could provide the cost of their education. Get really lucky, and they could be entirely self-supporting through their college years without having to work other than managing that property!

Goal Hunter – a monkey could of made money in RE in the last 8 years, it doesnt take a genius to make money in a bull market..can you do it when its a bear market? that is the real question. you will soon find out as we are headed that way.

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@2Hirondelles

Not sure I would agree with the way you put it. I see what you mean but wouldn’t that be similar to someone trading stocks on margin and only counting interest costs? Maybe I’m missing something here?

And I am talking about “investment properties” or 2nd properties, not the primary residence, just to clarify

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I, for one, think that real estate is a good investment. No, I wasn’t thinking of buying a home and selling it after, but more of, buying a property in a good “commercial” area, probably near a campus, where I can make it into a rental property so I could earn income. Money invested to buy the property is mine, and yet I get to earn income from the rentals.. Don’t know if that sounds like a stable plan, but it’s what I want as a “side business”.

Minrko: I did. We timed the departure of labour from Alberta returning to NL perfectly, where we had bought properties in advance. Consequently, we made appreciation money during the boom and another almost equal amount during the subsequent crash. We are now almost completely divested, searching for new opportunities to purchase by year end and we’ll see how it turns out in a few years.

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