Is Real Estate a Good Investment? I

Often we hear somebody proclaim:” Real estate value is always going up. It’s a good investment.”, “Real estate is a vehicle to hedge against inflation.”, “By leveraging others people money (OPM), we can achieve a retirement plan earlier.”, “As long as the rental could generate a positive cash flow, it’s a good investment.”

Let us examine the conventional wisdom one by one:

1) “As long as the rental could generate a positive cash flow, it’s a good investment.”

Case 1: By purchasing a condo priced at $ 200,000 and putting 10% down payment ($ 20,000) with the interest rate at 6.65% per annum for 30 years duration, the monthly installment translates into $ 1,155.54. While the rental collected every month is $ 1,000, this means you have a NEGATIVE cash flow of ($ 155.54). This calculation does not include the monthly management fee of $ 180, insurance charge, municipal assessment fee, broker fee for finding a tenant...etc.

People might argue that after 30 years, the condo is owned by the investor and the tenant is paying partial installment on behalf for the investor. This sounds good superficially for the investor, but when analyze deeply, the case seems reversed in the situation.

Assuming A is an investor and B is a tenant, let see what’s the impact for both persons:

| A | B
Down payment ($) | 20,000 | 0
Monthly installment / Rental ($) | 1,155.54 |1,000
Miscellaneous fees / charges ($) | 350 |0
Cash flow ($) | (505.54) |0

It is clear that B could save $ 20,000 for the down payment and at the same time, he could save roughly $ 6,060 yearly. When multiply for the duration of 30 years, B could save $ 181,800 + $ 20,000 = $ 201,800.

Although this is a simplified case where rental tends to increase, bear in mind the investor also feels the same burden that he needs to bear the hike of interest rate, broker fee, monthly management fee and so forth which in tandem with the current situation. By saving $ 20,000 for the initial year and $ 6,060 yearly, B could place this amount to other investment vehicle which could generate more handsome rewards to him over the years. Or else, if he can use this amount to fulfill his desire like buying HDTV, fancy car, travel around the world plan…etc. (Note: We do not recommend using savings for the unnecessary desires.)

Disclaimer: We do not recommend “Sell”, “Hold” or “Buy” for the investment in the article. Our objective for placing this article is to “Open Mind” for the investor by not becoming prey for the interested parties. Readers should exercise EXTRA care when dealing with their money for the investment.