The worst real estate investments.

[renatusus]

Here are a few things to think about and properties to avoid when you are ready to invest your hard-earned cash equity capital.



1. Anything that doesn`t generate rental income

These include second homes and land investments. Too many people invest
in properties hoping that they will go up in value. But there is an
opportunity cost to having money sit in real estate that doesn`t pay any
income. Even if the property goes up in value, you`ve got to reconcile
and account for all the money you would have earned if your money had
instead been in the bank or in stocks and/or bonds.



2. Anything with negative cash flows

If you buy a `prize property` ` such as a fancy downtown fancy condo,
beach property or vacation rental ` it`s probably going to be 20+ years
before you get your first dime of positive cash flow. And that`s just no
way to invest your hard-earned money. Pencil out any potential deal
ahead of time, and buy properties that pay cash flow from day one ` the
moderately priced properties in non-prize areas.



3. Tenant-in-common (TIC) investments

These were popular from 2005 to 2007 as a way to diversify a portfolio
without having to deal with the hassle of owning and managing real
estate. But few people ever earned a dime because of all the costs and
fees associated with the agreements.



4. Development deals

Development of land is extremely high risk. There are entitlement,
construction and market pricing risks, plus countless others. These
investments are best left to the extremely wealthy and experienced
investors who can take the chance that they`ll never see their money
again.



5. Condo-hotels, intervals & time-shares

These aren`t even investments. There`s no ability to predict cash flows,
rental income or future value/sales prices. And they are very hard to
resell and typically only at a fraction of the original cost.



6. Foreign real estate

You might be OK buying real estate in Canada or Britain ` however don`t
forget about the foreign currency risk ` but foreign countries generally
have different real estate laws, protections and fluctuating
currencies, making these properties extremely high risk.

 

[Thomas Beyer]

I'd say those statements are overly superficial.



People have died eating food or crossing the road. Should one therefore not eat anymore or not cross any road ?



Let me comment specifically on 2, 4 and 6:



2 - negative cash-flow: yes in the long term you should have positive cash-flow, but it is quite common that in the beginning of an asset purchase the tenant profile is poor or the asset neglected. That requires cash injection, perhaps for a sustained period of a year or three (depending on the asset). During that transition period you will have negative cash-flow, but the asset will be a lot better, the tenant profile far better, vacancies lower and the asset far more valuable. I (and our co-investors) have made millions doing this repeatedly.



4 - development deals: yes they are more risky than "buy and hold" but you can make a lot of money in construction or land development if done properly.



6 - foreign real estate: yes, it is slightly more risky due to currency issues, but buying elsewhere in the world can be very profitable if one does enough research into the local market. Specifically, there are many places in the US, Austria, Germany, Sweden, Libya, Mexico, India and China (to name a few) where values have risen substantially over the last few years due to significant economic expansion - in many instances far more than some Canadian cities.

 

[tnguyen]

I strongly agreed with Thomas. Only if you've done your homework, research, then your risk levels are low. Timing the market is another aspect to lower your risk. Make sure you're in the driver seat.