Real Estate Investing – Its simple math & logic – but nothing without a little risk!
This is a story of five old pals, Kumar, Roger, Cindy, Harry and Jessica. In 2008, each decided to invest $100,000 somewhere. They all already owned homes worth around $400,000 and incidentally, everyone had about $100,000 left on their mortgage. Like anyone else, they all had their own wants and needs, and a strategy they thought was best in their given situation.
Real Estate Investing Style 1
Kumar, lured by the charm of a larger home for his family, decided to move to a bigger house. He used his $100,000 savings, bought a house for $500,000 and continued to live there happily. After three years, Kumar’s home is worth around $600,000 or 20% gain over last three years. Kumar’s gain = $100,000.
Real Estate Investing Style 2
Roger, being conservative by nature, decided to pay off his balance mortgage loan. He was happy, and why not, he is one of the lucky Canadians who celebrate a mortgage burning party early in life. After all, he now lives in a debt free home. His house increased in value over these three years. What else could he ask for? After three years, the value of Roger’s property has gone up to $500,000. That is a whopping 25% overall appreciation. Roger’s gain = $100,000.
Real Estate Investing Style 3
Cindy on the other hand, invested her $100,000 in two resale condos rather than paying off her mortgage loan. She put $50,000 in each property and bought two condos worth $200,000 each. She is a keen real estate investor, and prefers to make her money work harder for her in terms of returns. The two condos, once rented, practically paid for themselves. On a side note, she may even choose to hand her keys to help her adult children own a property, giving them a head start their life. In these three years, all her properties grew up in value. Her original residence is worth $500,000 now. With an overall gain of 20%, both her condos are worth $240,000 each, as of today. Cindy’s gain = $180,000.
Real Estate Investing Style 4
Harry decided to invest his $100,000 in stocks and mutual funds. We all know that since 2008 the stock market has had its ups and downs. After losing almost half of the value of his well diversified portfolio, Harry is yet to recover in full. Should Harry decide to cash in today, Harry would end up losing almost $10,000 out of his total investment of $100,000. Harry’s gain = negative $10,000.
All of the above gains or losses are only on paper, before other expenses, and not actual returns on investment. Profit and loss incurs when investments are cashed in. Both stock and real estate incur buying and selling costs, broker’s commission, management fees, capital gain taxes etc. Rental properties involve maintenance expenses, repairs, property taxes etc.
During these three years, principal portion build up has also helped to increase equity in all of the above properties. Even better, in case of rental properties, tenants helped in paying off landlord’s properties (as in the case of Cindy).
Real Estate Investing Style 5
Jessica did not have any savings of her own, but she had over $200,000 room in her secured line of credit. On her financial advisor’s advice, Jessica borrowed to invest $100,000 from her secured line of credit into two builder pre-construction condos worth $200,000 each. Though delivery of these two condominiums is yet to happen, Jessica knows that the market value of these condos in today’s market is no less than $240,000 each. Jessica plans to put 25% down payment in each of these properties and does not want to incur negative cash flow upon renting. By the way, her final installment before closing ($40,000) is due on occupancy. So in a way, to date, Jessica has only borrowed $60,000 from her line of credit. Jessica has some three options and she has not yet decided. Jessica might sell both her condos and cash in her profits, sell one and rent the other or rent both her condos.
Moral of the Story
Moral of the story, women are smarter than men! Just kidding – it is important and pays to be open-minded towards at least evaluating different options available to you if you have some extra cash to invest. Everyone has a different perspective on life, and everyone is right in making their own decision. I do personally believe in the potential of real estate in making you rich! And, I practice what I preach!
Finally, remember, before you venture out into investments, it is prudent to speak to professionals (lawyer, financial advisor, tax accountant, Realtor etc.) first.
Contact me if you’d like to learn more about real estate investment opportunities and to discuss options that might be right for you.