February 29, 2012 Leave a comment
I have heard a lot of my friends who believe by investing in real estate property make will them super rich.
Here’s their claims:
1. Properties prices will go up forever.
2. It gives them passive income.
3. In future they can sell it for higher prices and upgrade to a bigger house.
Let’s analyse how true those claims are.
1. Properties Prices Will Go Up Forever.
We have witness one of the greatest depression caused by the housing bubble in 2008 across countries in US and Europe. It happened in countries in south East Asia during the 1997-1998 Asia financial crises, during those times, people who bought those houses at the inflated prices, until today they are either in a loss position(negative equity) or manage to break even after the prices are slowly picking up. Prices might continue to go up, the question is how long will it take? 10 years? 20 years? Is it worth it?
2. It Gives Them Passive Income.
This is true if you have a second or more properties where it can fetch you good rental income. And those rentals can be used to fund the housing loan, or give you additional money to spend. The reality is, if you need a bank loan to get a second property, you need to have good credit background. Or Else, you will have to find cash to fund your purchase. Also, you need to spend effort to manage your tenant and hope that they keep the house in good order. Else you need to spend extra money just for the maintenance when they move out.
3. Sell It For Higher Prices And Upgrade To A Bigger House.
If your plan is to sell the house at a higher price so you can use the profit to fund your purchase for a bigger house, you end up working for the bank because you will need to loan extra cash to pay for the bigger house!
Take the simple example below:
Small House = $200,000
Big House = $300,000
10 Years later, assume that prices gone up 50% for both houses.
Small House = $300,000
Big House = $450,000
$450,000 – $300,000 = $150,000 more needed to pay for the bigger house!
You will only make profit if you are downgrading to smaller house, and invest the profit to pay for your second property, and then use the rental income to pay for the mortgages. The question is, are you willing to downgrade?