The Downfalls of Real Estate

For the average person with limited cash, financial literacy, and earning power, real estate is often the first investment avenue of choice next to a savings account because of the following advantages:

• High leverage available, making it assessable to people with limited cash.
• Simplicity of understanding- buy property -> look for renter, check references -> collect rent cheques -> keep up with maintenance -> sell property.
• Tangible- psychologically pleasing to the average public.

However, the drawbacks are noteworthy:

• Formalities and illiquidity- lawyer paperwork, preparation required to sell property, length of time spent looking at properties or showing ones for sale, etc.

 

• Laws in favour of tenant- problematic renter can be difficult to get rid of and cause heavy losses, as ongoing money is spent on upkeep of the property, mortgage payments, taxes, and other associated carrying costs while receiving no cashflow. During the lengthy eviction process, then such tenant is at high risk to cause further losses by damaging the property.

 

• Dependency on leverage to achieve respectable returns. Cash-on-cash returns outside Vancouver and Toronto areas often fall behind many blue-chip stocks, especially factoring in maintenance and transaction costs such as agent commissions, lawyer fees, taxes, etc.

 

• Dealing with the biggest enemy in this area- the banks. Banks shun risk takers and underwriters love to find reasons to slow you down or deny your goals, despite being paid as a result of the bank’s business with you. This is especially true if you are self-employed, employed with a volatile income, or receive earnings in a manner that is inconsistent but required to produce higher profits. The general public and banks like the customer who takes a salary office job for x income that rises slowly over many years and maybe after several years, acquire the first property, and the second after many more years. They like someone who makes enough money to service his/her debts with enough consistency, but never make money fast or enough to escape the bank’s grip. Also because many people who work at banks are failed risk takers and hate people who do better than them while they’re stuck at their menial office job that pays chump change that rises only gradually over many years. Successful risk takers who are actually good at managing and growing money, do not need the bank’s salary. They like the perceived stability of a salaried office job, and think they know everything because of their financial education and experience. With stocks, there is less fighting involved- just open a trading account, put cash in it, buy stocks on exchange, and then hold. Nevertheless, you do not have as large of a hand of the public’s fear (savings).