Here is one common mistake I notice about real estate: I talk to a lot of people who are involved in money losing real estate ventures. These people are renting out a home for a net loss. For example, John from Vermont owned a condo, which he rented out for $700 per month. But the condo’s mortgage payment alone was $775 per month. Then, he had to pay association fees, bringing the condo’s monthly costs to almost $1,000.
“One problem I see you having is that condo,” I said.
“I bought that condo as an investment,” said John. “It’s making me money.”
“No, it’s not. It’s costing you almost three hundred dollars per month, which according to your budget, you don’t have.”
“But it’s in a hot area. I think it might double in value.”
John wasn’t being realistic. And he wasn’t using common sense.
First, if he’d sat down and totaled up his living expenses and his income, he would have realized he literally did not have enough income to afford an additional $300 monthly payment to cover the mortgage and condo fees.
Second, a money making investment does just that — it makes you money. This condo was worthless to John. It wasn’t producing any money for him, and he couldn’t live in it because he’d leased it out. So what was John getting for his $300 a month? Nothing. At least the tenant was getting warmth and shelter for his money.
“The bottom line is, you’re coming up short every month in your finances,” I said. “And this condo is just another expense. You don’t have three hundred bucks to pay toward that condo every month. The only reason what you’re doing would make sense is if you had plenty of money to spare, and it was someplace you wanted to move to in the future because you like the area. Basically, a total luxury.
“What you’re doing is a bad business deal. If it was putting even twenty bucks in your pocket each month I wouldn’t be saying this. When you rent property, the monthly rent has to cover the monthly expenses and debt payments on the property. Otherwise it’s a money losing business venture.”
This is extremely important to remember if you want to get into the property rental business. What happens if your rental goes vacant or the tenant stops paying rent? The bank’s not going to care. They’re still gonna want their money. And condo associations are famous for leveling additional assessments for specific improvement projects. These are all expenses that must be factored into the cost of renting property.
- For investment properties, cash flow is the Holy Grail (theglobeandmail.com)