[tbone]

Hi everyone,
I’ve been mulling over this real estate investing option and I’m trying to figure out what the drawbacks are b/c it sounds fairly good from what I can tell.

The investing is through a real estate investment company that does analysis and finds properties to present to investors...

• They find the property (usually a new condo development), mark it up and the investor purchases through them.
• Then there is a management company that charges from $25 - $45 a month to take care of all the landlord duties. There is also some protection offered against vacancies.
• The properties typically cost $100K so usually you have to come up with $25K for the down payment to make it cash flow positive.

So obviously you pay a premium to have the company find what you would hope is a solid investment, then there’s also paying the monthly fee (I believe the fee could be tax deductible though).

I was thinking I could use my HELOC to come up with the down payment. So I’d be 100% leveraged but all interest from the HELOC and the mortgage would be tax deductible. After 25 years the mortgage has been paid by the renter (other than the original HELOC balance), the property would have appreciated in value by what you would hope would be a 2% or so each year and you’d still have the residual income from renting the property.

Can anybody point out any potential risks or flaws in this strategy? From what I can tell the biggest risk would be remaining cash flow positive in the early years after covering all interest costs.

I’d really appreciate any thoughts – good or bad

Thanks,
Tbone

 

[Potato]

If you want a hands-off real estate investment, why not go with some REITs?

I'm not very familiar with these sorts of companies, but this one sounds like a scam: they're probably going to make all their money in that initial "mark up" and then run off, because there's pretty much no way $25/mo covers "all landlord duties" including vacancy protection.

 

[tbone]

Here's the website:
http://www.ppgcorp.ca/index.htm

I met with one of their "investment executives" a couple years ago. Everything seemed legit and the company has been around for a while so I'm pretty sure it's not a scam.

I see your point about REIT's. I guess the difference is that in buying an actual property you can get a mortgage and start with an initial investment much larger than just borrowing from my HELOC. But I see what you're saying...

Thanks for your reply,
Tom

 

[Rickson9]

This can't end well...

 

[Cal]

Somebody will make money off of this. Just might not be you.

REIT's do pay a good disbursement. They are worth looking into.

Depending on the rate you obtain a HELOC at you may want to use those funds to purchase some bank preferred shares or something at a higher rate of return. (Not offering investment advice) Just trying to show you that there are several options for your hard earned cash.

 

[Berubeland]

First of all the first problem with the $$$ scenario is the initial prices seem very low.

1 - $100000 doesn't buy a condo here in TO never mind Vancouver
2 - Maintenance fees in a decent building are usually around $400-500 per month
3- Property management fees of $45 seem pretty low to me

The math doesn't make sense to me.

Remember that it is very hard to get a positive cash flow situation in any large city in Canada it is like looking for a needle in a haystack.

I do not believe that you can buy a condo and rent it out for a profit after maintenance fees never mind pay a property manager.

 

[tbone]

Thanks for your replies guys.

I believe the properties usually purchased are in other areas of BC and Alberta where condo prices are more reasonable, but ya, $100k in any case seems low. Sorry - I wasn't specific enough with my example.

 

[RI.ca]

REITs have become a popular way for people to stay involved in the real estate market without having to deal with the headaches of collecting from tennants and property upkeep. You are able to follow the operations of the REIT almost the same way you would your own investment, but it is often on a larger scale.
Many people and institutions that do invest in REITs are not exactly real estate savvy rather they are more stock people. The REITs, though traded on the stock exchange, should not be viewed the same way stocks are. REITs are real estate companies first and stocks second, which means they should be following the real estate market rather than the stock market. Typically the real estate market will trail the stock market by anything from 3 to 9 months.
We have great information available on our site for anyone interested in getting involved in REITs and Real Estate investing. The drill downs are done by our analysts who are experts in real estate.
I hope you have great success in your real estate endevours.
RI

 

[NorthernAlex]

Hi tbone.
I am very boring and a conservative RE investor. As soon as I hear 100% leverage my heart goes booombooomboom! I would recommend to have some cash in hand before going in any direction of investing in RE.

But, I actually wanted to point something else out, what I am doing from time to time if I have the right property and partner. I mentioned it a couple posts here already, but continue because I like it.

Do a Joint Venture with someone who is professionally already in RE investing. You could do the standard JV, where both parties give a down payment and one is doing the paper work and gets a bit more cash in return

or

a JV where you are the money partner and the pro is a finding partner. In short, you bring cash and are on title of the property and do not have to handle daily business and the finding partner has a caution on title, does the work and you share the positive cash flow 50/50.....60/40... whatever you work out.

I have two JVs like this. One where I am the money partner (and getting approx. 11% ROI + appreciation) and one where I am the finding partner (and where I pay 12% ROI to my MoneyPartner and he has the appreciation).

I don't have an JV to offer, nor I want to convince you to do this, but I think it is a great investment vehicle if you don't want to have the hassle of a landlord (which is quite a thing here in Ontario) and don't want to invest in a REIT, which I wouldn't do as they are mostly heavily invested in commercial RE.

Doing a JV? Be careful and pick a potential partner wisely as you are "married" to him for a couple years. Do your due diligence in regards of the property.

Condos are, FMPOV, a bad deal as they are too expensive to positive cash flow and the market is too hot there. Have a look at multi-family homes- if you have a 5plex, it is not that bad if one apartment is vacant. If the condo is vacant you will end with ZERO income, but still have all the expenses....

 

[Rickson9]

Hi everyone,
I’ve been mulling over this real estate investing option and I’m trying to figure out what the drawbacks are b/c it sounds fairly good from what I can tell.

The drawback is that you don't know what you're buying because somebody else is buying it.

It would be akin to having somebody buy stocks for me and adding a fee to boot... like a mutual fund... whose performance can't match an index... and that I can beat doing myself. I don't know what they're buying and if I did (by reading the prospectus), I wouldn't agree to be buying in the first place.

If you can't evaluate the quality of the asset being purchased, you are at risk for capital loss.

http://www.greaterfool.ca/2009/08/13/not-so-much-2/

 

[Cal]

Funny Concrete Equities came to my mind too while reading this.

 

[Berubeland]

The drawback is that you don't know what you're buying because somebody else is buying it.

If you can't evaluate the quality of the asset being purchased, you are at risk for capital loss.

I definitely don't like this. Any property management company should let you know what you are owning take you through it and tell you why they think it is a good buy.

 

[josephina]

How do average real estate prices relate to the interest rate cycle? In other words, I am asking whether higher interest rates cause real estate prices to be lower or higher, and if a generalization can be made.
__________________
market samurai ~ marketsamurai ~ marketsamurai.com

 

[Berubeland]

When interest rates are high price trend down- it costs more to service the same mortgage.

When interest rates are low prices trend up.

When lending criteria go up - prices go down

I have often asked myself what would the prices of houses be like if there were no mortgages whatsoever. People would have to save and pay cash for the house.

 

[Kevin V. Price]

I am doing this business on small level. I have two properties in my town and I rentout them. Mostly sale them after two yeas with satisfactory profit. But I hire a property consultant who help me for buying or selling the property. Real Estate investment is a good business but you need the right match for your investment.