QUOTE (UTCVenturesLtd @ Nov 7 2009, 04:43 AM) Everyone seems to have either a horror story or something that crawled out from underneath a rock and bit them! Life in real estate investing does have it`s low branches to watch out for. Some things that can go wrong are rare occurances, but they do occur. This topic seems like it would make for a good educational thread.I will share this story...
I did a property purchase many years ago. I had just sold a house in Winnipeg in 1986 and was planning on moving to Vancouver at the time although nothing was becoming settled on the matter. Instead of renting til a final decision was made, i ended up buying a bigger and better home with an attached garage feeling that i would be stuck in Winnipeg. Opportunity shortly after presented itself to move to Calgary. Bad news was i lost $10k on the deal. Good news that i was able to get in the Calgary market in the spring of 1988 as property values were starting to rise again and more than made up for the loss. That was the only property that i ever lost money on.
Moral of the story is that there is a valid time to be a renter!
Great thread, I will attempt to keep it going by sharing some analysis I did that ended up getting turned into a story and included in Kieran Trass`s new book called The Housing Bubble. The story is based on two real estate investors who had different strategies with the same objective, maximize their returns on investment through real estate.
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Mr. Get Rich Quick and Mr. Long Term Wealth
In 1982, two Calgary, Canada, Real estate Investors, Mr. Get Rich Quick and Mr. Long Term Wealth made a bet. Each starting with $100,000, they would invest in real estate and after ten years the one with the most money would win the bet.
Mr. Get Rich Quick`s strategy was to chase appreciation by timing the market cycle. Mr. Long Term Wealth was content buying properties with strong cash flow in well-positioned locations and holding them long term.
Let`s see who won the bet:
Mr. Get Rich Quick made the following investments:
• Immediately after making the bet, he bought 11 properties, each with 10% down payment and a negative cash flow of $25 per month.
• Before the market crashed in 1984, all the properties were sold and he earned a profit of $68,978.
• Sensing the market was about to recover, he bought 25 properties in 1985. But as the markets continued to drop in 1986, he sold all his properties with a small loss of $4950.
• In 1988 after the market had recovered, he bought 23 properties with 10% down and negative cash flow of $25 per month for each property.
• In 1989 he accumulated negative cash flow of $6900.
• After the market took a big jump in 1990, he sold all 23 properties for a profit of $151,029.
In short, Mr. Get Rich Quick made a total of 118 real estate transactions and accumulated a profit of $208,157.
Now, let`s see what Mr. Long Term Wealth did with the same money over the same period:
• In 1982, he bought 5 properties, each with a 25% down payment and positive cash flow of $200 per month, per property.
• In 1983 and 1984, due to an economic downturn vacancies skyrocketed and rents dropped. As a result, he lost a total of $7500 over the two years.
• By 1985, his properties were again cash flowing positively as rents increased and vacancies subsided.
• All properties were held until year 10 when they were all sold for a profit of $174,826.
In summary, Mr. Long Term Wealth made a total of b>10 real estate transactions (compared to 118 made by Mr. Get Rich Quick) and generated a profit of $317,326 (compared to $208,157 made by Mr. Get Rich Quick).
The data used in this exercise is actual data from the Calgary market from 1982 to 1991. In addition, typical real estate transaction fees and capital gains tax were factored into the calculations. A common interest rate of 8% and a 25-year term was used for all mortgages.
Mr. Long Term Wealth`s real estate efforts were focused on ensuring that his five properties were well maintained and impeccably managed to maximize his cash flow. He bought his properties two years before the greatest real estate crash in Calgary`s history. By holding them through a cycle to 1991, he was able to more than double his money while earning steady cash flow the entire time.
On the other hand, Mr. Get Rich Quick spent his days worrying about the market and trying to stay on top of his 118 transactions. This left him with no time to earn income from other sources.
The moral of this story is: Your chances of creating sustained wealth in Real Estate are far better when you take a long term approach combined with an understanding of the real estate cycle.
