REAL ESTATE: IS IT REALLY THE BEST INVESTMENT?
One of the greatest investments of all time has appeared to be real estate development and other activities in real estate. It can be argued, however that real estate is just like any other investment such as stocks and mutual funds. When looking at the idea of investing in real estate – people often like to do it as they collect passive income and it requires very little work – or it does on the surface anyways.
For a passive investment – real estate does not appear to be so passive as one must find renters, maintain the property or find people to maintain the property and collect the rent or have a management company do it. Yes someone else is paying for your investment so the gain is on the value of the property itself once it’s disposed of. It does have a tax advantage when you go to sell the property as it falls under capital gains (assuming that you are not in the business of buying, fixing, and than selling properties). The rent collected over the long term is treated the same as interest or employment income and is taxed at your marginal tax rate – the one exception is you do not have to pay CPP on it. Rental properties are also good as they are considered income for RRSP purposes.
I have heard from may sources that real estate can be a massive headache, especially when it comes to the apartment style condo. In the current economy, people are holding on to them as they cannot get their money out and are forced to pay for special assessments where they often have to come up with extra money out of the blue – on top of the condo fees which may or may not be covered by the tenant. Yes, the special assessments can be deducted but is it really worth it to pay for example $3 000.00 to get $750.00 back assuming a 25% tax bracket or would you have been better of to let the $2250.00 grow in a tax free savings account or let the full $3000.00 grow in an RRSP since RRSP’s are bought with whole dollars, not after tax dollars. I guess that it depends on how much the property value is going to grow versus the additional money that may have to be put into it.
One of the tales that I often hear about is what I refer to as the “Devil Tenant”, the tenant that does not take good care of your investment and at times even destroys it. For example, I know of a poor soul who bought an apartment style condo for around $70 000.00 and it was good in the beginning as real estate was booming at the time and the value grew to around $140 000.00 – this can be considered a good investment as it looks like the gentleman doubled his money -who wouldn’t like that. Enter the “Devil Tenant”, he took a hammer to the sink and toilet and flooded the entire unit and the unit underneath it. The individual had to pay around $40 000.00 to make the unit available for rent or saleable once again. Now, this is an extreme case but it is just one example of why real estate isn’t risk free either. Yes, this individual got to expense $40 000.00 on his tax return as it was accepted by the CRA that there was no betterment since a flooded property is rendered uninhabitable and as a result could not be rented – or sold in that state.
While real estate can look like a promising investment, I believe it is like everything else – you must do your due diligence and research to see if there is an opportunity for long term growth. I believe, ultimately there could be good growth if you are able to get a tenant to pay your mortgage without having to put too much personal money in as you get your money out of it once the property is sold plus the growth – the more money you have to put in, the less growth.
I am always amazed by the people who tell me that real estate is good for your taxes and that you can get excellent money out of it with very little risk. I’m sure it’s true sometimes but there are so many factors that must be considered when getting involved such as the economy, market conditions, liquidity, mortgage rates just to name a few – along with an ultimate factor that can be somewhat controlled, whether or not you get the “devil tenant”, in my opinion the number one obstacle to the creation of wealth using real estate.
What are your thoughts? is real estate still the be all and end all of investments or is it just like investing in everything else.
In my next post, I’ll talk about another investment – starting the small business.
I am from nigeria and immigrated to Canada legally with my family. I worked hard to purchase a rental unit and it was a quagmire. One bad tenant after another. The only people I did not have trouble with was a young chinese couple who kept it very clean and even put plastic covers on the furniture. I would have no problems renting to the chinese peoples sorry if i am coming across as racis but I have had very bad experiences especially with young white people they do not care.
Sounds like you have had your fair share of “Devil Tenants”. It is hard to determine who is a “Devil Tenant” upon renting which is part of the risk I guess. Please remember that anyone from any culture could be a “Devil Tenant” it is so hard to tell until you experience it for yourself I guess. Hopefully you didn’t have to fix too much because too much fixing erodes the value of your investment.