First Signs of the End of the Real Estate Bubble

[sprocket1200]

Investing is always better than spending.

[Rusty O'Toole]

@Rusty

You mention that with RE, you "wait for inflation to do its magic". In that case, are you not only hoping to break even (i.e., preserve the capital)?

If not, do you believe that RE can appreciate faster than inflation forever? I can't remember who did it, but I recall a thread where someone appreciated housing by inflation +1% from ancient greece to now and the end result was that the modest 2,000 year old craphole house from ancient greece could not be bought with all the money in the USA. At one point, it will revert to the mean(relative to inflation).

You are overlooking the power of leverage or using borrowed money. Suppose you buy a house with 10% down payment and a CMHC insured mortgage for the other 90%.

Now suppose real estate goes up 10%. That means you just doubled your money. This is not at all unusual. It is not even especially creative.

I have bought rental properties with no money down, that brought in enough rent to pay all the expenses, pay the mortgage payments, and leave me $1000 cash at the end of each month.

So what was my percentage return, considering my out of pocket investment was zero? How many could you afford to buy, if your down payment was zero and your monthly payment was zero?

How fast would real estate have to appreciate to make you rich? What if I told you it wouldn't matter if it didn't appreciate at all?

Suppose I bought a million dollars worth of property with low or no down payment but the rental income covered the payments. Now suppose I was DEAD WRONG about real estate and real estate did not go up ONE PENNY in 20 years. This has never happened but suppose it did?

Well at the end of twenty years all the mortgages would be paid off and there I would be, stuck with a million dollars worth of property. Free and clear with a steady monthly rental income and no mortgage payments.

When I started out I made the mistake of selling a property when I saw a juicy profit. Then watched the same property continue to soar in value. Eventually I figured out, procrastination pays! It's the only business where sitting tight and doing nothing pays such big dividends.

This is barely scratching the surface. There are other things you can do that multiply your gains. Unfortunately they require work, brains, knowledge and even a little risk. I want to get away from that and into some sort of investment where I sit with my feet up on the desk and let someone else do the work.

[Rusty O'Toole]

I'm glad you brought up Greece. If that old Greek had bought a house 2000 years ago and passed it on to his heirs, his progeny could be living there yet.

If he invested in nice safe government bonds how much money would they have today? Greece's government bonds have gone to zero about every 50 years as far back as history records. If you don't believe me, they are in the middle of doing it again.

Go ask a Greek if he wishes his grandfather invested in property or government bonds. He'll look at you as if you are crazy.

[Berubeland]

Once upon a time, I bought a unicorn and every time it passed wind rainbows flew out of its ass. It sure was nice. All those rainbows.

The unicorn never needed a stable, unicorn food, water, brushing, veterinary care or any other things you might imagine a unicorn might need that might cost money it was all free like a magical dream.

It sure was nice when the unicorn started sweating gold nuggets after 20 years. True passive income, just sit under the unicorn and the gold falls on you.

[Chris L]

If you aren't making money the day you buy RE, it's not an investment. Waiting for 25+ years is ridiculous - especially in hopes of eventually being compensated for the risk you take. People underestimate the huge amount of work and risk that is involved in RE and we've all heard the dozens or so reasons to invest in RE and the ways to make money (eventually or in the present), but it's simply not investing if you're not cashflow positive the day you buy.

If you're subsidizing your tenants, then you're speculating - it's simply not an investment. 25 years to profit is going to wear you down, day in and day out. I'd much rather be paid to do work so a second part-time job would be smarter than going cashflow negative. Do that math.

If you're buying cashflow negative, you're investing at the wrong value. Wait... or start a business.

[Cal]

I agree w you Chris L. It has to be cash flow positive from day 1. It can't break even and hope for inflation to give you capital appreciation.

[Rusty O'Toole]

You would think after 35 years I would be used to people telling me I can't make money in real estate. Fortunately it works whether anybody believes it or not.

[Rusty O'Toole]

So how's that following the herd thing working out for you guys?

[ddkay]

For the average place in downtown Toronto, with no mortgage it's pretty damn hard not to be cashflow positive from day 1. If you add in the expense of a mortgage to vacancy, taxes & maintenance, you are paying down the property with interest, and praying appreciation will outperform inflation+interest.

[Square Root]

So how's that following the herd thing working out for you guys?

Actually, I think real estate is a place where the herd is pretty well represented.