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Property investment is profitable. Really?

May 14, 2009

I admit I am a little clueless about this. I have never traded in properties in my life. The only house I bought is not in Asia and I bought it to stay in it, not to resell.


And no, its not a pineapple. πŸ™‚

So lets assume I bought my house at $500k with the intent to sell it at a profit, maybe 10 years later.

Yeah, I’ll sell it at $650k and make a 30% profit. That’s a cool $150K. A better return than FD.

So I take out a 15-year home financing package. For the sake of agument, lets assume by the 10th year I would have paid the bank $750K in capital and interest. I’m left with an outstanding balance of $150k.

It means that at the end of the loan period, I would have paid the bank $900k for a house worth $500k.

Year 10 comes and I sell it off at $650k as planned. Remember that I had already paid the bank $750k to date and I still owe them $150k.

To make it simple, I sold an object for $650k after having spent $900k on it.

So did I make a profit or a loss on that investment?

I was told rentals is the key. Okay, let’s go with that.

If I rent it out at $3k a month it will take me 25 years to break even. Maybe 30 if I include renovation, property maintenance and repair, taxes, etc.

If I buy at age 30, the property will only have paid for itself when I reach 60.

Simply put, I’m in the red for 30 years in order to be in the black for about 10 years before I croak, assuming that I live till 70.

Suffer 30 years to enjoy 10 years.

Am I going about this all wrong or is property investment really the best investment ever.


4 Comments leave one →
  1. May 14, 2009 9:39 am

    I think you’ve forgotten about the other form of investment – you are staying in that house or you are renting it out. Either way, you do gain some benefits in keeping the house for that good 10 years. Say you rather leave it there and rent a place for maybe a few hundred in a month…..calculate that for a good 10 years. it’s quite a significant amount.

    what most RE investors do is that they flip after the property has been completed. flip, gain 20-30% or even 60% if lucky, and use the money to buy more property (in order to escape tax as well). it’s something like the snowball theory.

    yes, the banks will still be chasing after you, bt if u manage to leverage on the loan and prevent the interest rate from becoming larger than life, i think it’s still ok.

    problem comes when….u cannot flip or rent the property…and u already have your own home. πŸ™‚ banks will be on ur back, and u cannot get the money u wan to pay back. πŸ˜›

    Yeah admittedly I know nothing about the flipping aspect. Sounds like that’s the secret to the trade. πŸ™‚

    From the regular homebuyers I speak to, many seem to be under the impression that you can buy a house for $500k today, sell it for $700k 10 years later and make a tidy $200k profit. Nobody seems to remember that the finance interest alone will wipe out any profit they stand to make. That is, if they were the ones paying the mortgage not a tenant.

    U might have seen online debates about whether a house is an asset or a liability from a homeowner’s (vs. property trader’s) point of view. Many interesting arguments there. πŸ™‚

  2. May 14, 2009 2:56 pm

    REI is not for everyone. Of course it’s nice to see RE investors making millions (billions for some) but if you don’t calculate properly, you’re pretty much screwed. One wrong investment and it can bring you down forever.

    500k -> 700k in 10 years? not a very good deal actually esp if you are not renting it or not using it…in other words, not gaining any benefit from it during that 10 years. one needs to b aware of the cost of maintaining the property for 10 yrs – the interest charges from loan, maintenance, clean up, taxes, etc.

    and covering all those costs……200k in 10 years might not seem like a very good deal.

    It would be interesting to see a comparison between RE and other types of investment from a risk and returns perspective. I know sometimes its like comparing apples to oranges but that would be useful for people like me who treat the object of trade as just a means to an end.

  3. May 14, 2009 7:10 pm

    well , being in the property market and selling property is a pain in the arse

    not everyone is qualified for loan . too much effort for a sale

    Most certainly a gig on broadway is more fun than buying & selling houses, hehe. πŸ˜€

  4. May 15, 2009 12:10 am

    Cash is King, that’s the formula. More cash, more return. More you owe the bank, the more the bank earns. Keep the loan short to maximize profit.

    Never buy a property that is way over your budget. You do need to sit down and do all the calculation before investing.

    Next is the location of the property, there are properties that double/triple in price after a few years.

    Ah.. sounds like you’ve done this before. πŸ˜€

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