The pros and cons of investing in real estate

Investing in real estate is once again in vogue. Here, I will discuss the advantages and disadvantages of buying an income property to help you assess if this is the right financial strategy for you.

Pros

I believe investing in real estate in the long run can help you reap considerable financial benefits.

With as little as a 5% down payment, it is quite feasible to locate an investment property which will carry itself (with the affordable cost of borrowing money today). For example, if an investor purchased a condominium apartment for $150,000 with a minimum $7,500 down payment (5%), the monthly carrying costs (mortgage, taxes, and maintenance fees) will be approximately $1450/month. It would be a reasonable expectation to attain $1400 to $1500 per month in rental income for this same unit. You would then have an investment in real estate which historically has always yielded healthy positive returns, being paid off by your tenants.

Let's do the math. If the property appreciated at a conservative rate of 3% per annum, in 10 years the real estate holding would be worth $201,587 and in 15 years it would have a value of $233,695.

What if you paid your mortgage biweekly and took other measures (discussed in previous articles) to pay off your mortgage quickly (let's say 15 years). You would own an asset free and clear that would have a value of almost one quarter of a million dollars and it would be generating you a gross monthly revenue of $2336 (assuming an annual rent increase of 3%).

Remember this was all achieved with an initial cash outlay of $7,500. This, in my books, constitutes leveraging your money for maximum returns with minimal risks.

What an excellent retirement vehicle, you can create your own pension by having two or more investment properties plus at the same time build a significant level of equity.

It is important to understand the tax implications of your real estate venture. Your financial objectives will largely govern what kind of positive cash flow (if any) you wish to attain. I will discuss this issue at length in a future article.

Cons

What is the downside of acquiring an investment property?

Firstly, if you end up with a not so desirable tenant who doesn't pay his/her rent that will obviously pose a problem. Let me start by saying that most of the tenant problems can be eliminated by proper initial screening. If the tenant has a good credit rating, stable employment and good references that is usually a good indicator that he/she will be a dependable and reliable tenant. If, however, the rent does go into arrears there are a series of steps you need to take (which I will address next issue) to either have the tenant bring the rent to good standing or have the tenant evicted. Nowadays, with the Rental and Housing Tribunal acting as the governing body, the process is much quicker and more efficient than in the past when you were forced to go through the time consuming small claims court process.

Another concern is assessing the potential for the property to sit vacant. We are fortunate in the G.T.A. and surrounding areas because we have a very low vacancy rate. Properties for the most part get rented out in a very quick time frame. I seldom see a property vacant for more than a week or two.

Lastly, an important consideration is the tenant's wear and tear on the property. If a fixture breaks (for example, an appliance) or if there is a plumbing issue, you, the owner will be responsible for addressing the problem at your cost and in a timely fashion. This is something to be cognizant of. Of course, if it is a newer property, chances are not too much will go wrong. At the end of a lease term you can, generally speaking, anticipate having to paint and clean after a tenant has vacated the premises. However, if there are more significant damages then it may necessitate having to take additional action. This is why it is so important to do your due diligence from the beginning when choosing your prospective tenant.

What if you bought a property and real estate prices stayed flat for an indefinite period of time. You would still have an asset which was being paid off by your tenant and it still would represent a sizeable equity position for you in the long run.

Conclusion

With the paltry returns being offered by the banks and the uncertainty of the stock market, real estate investments have once again become an attractive, relatively safe alternative . Currently, the return on your real estate investments can be anywhere from 7% to 10%. If you can accept the downside, I believe you will prosper immensely by incorporating some real estate in your investment portfolio. Remember, this is not a get rich quick scheme, but if you exercise patience, over time it will enable you to become a financially independent individual.

Next issue, I will discuss the role of the Rental and Housing Tribunal and how to deal with less than desirable tenants!