I have a lot of friends who tell me that they LOVE real estate and have invested in a second house. That is a wonderful thing and I hope it makes them extremely happy. However, I want to make it understood that it is not investing, with one exception.
Owning a vacation home is fantastic. My friends tell me this and I usually hear next that, “it’s been a great investment”. Being a bit of a instigator, I always ask, “has it?” This is inevitably followed by an explanation of how they got a great rate on the mortgage, appreciation is happening at their location and the kids love it. OK, I believe part of that, but is it really an investment or just a great purchase of something they can use? In my mind it’s the latter.
First off an investment means the use money in the hope of making more money. Let’s call it an item of value with an expectation of favorable future returns. Whether that is net gain on sale or receipt of cash flow during the holding phase of the investment with later return of principal. An investment therefore, in simple terms should make some money. Or as Robert Kiyosaki has said,: “an investment puts money in your pocket”.
Think about your primary residence. There are taxes, maintenance and those annoying utilities. Those don’t go away with a second house. Over the years that you hold the home you are paying all those bills and then hoping to sell for a profit. So, of course we count on rising real estate prices to make up the difference. As we all have just experienced that is a false assumption. Prices of homes don’t ALWAYS go up.
A second home can be a great pleasure. It’s wonderful to visit and relax, take the family and friends. Basically you use it. Therefore, many have called it a “use investment.” Makes sense to me. But are you going to make money? Maybe. In the long run it’s most likely going to pull money out of your pocket to keep all the bills and maintenance paid for. I realize there have been many exceptions. In a rapidly rising market like we experienced in the recent past, it was a great investment tool. But, that’s a gamble and many people just found out that they lost that bet.
The one exception to this is if you are an active renter of the property. If it’s in a good location with a long rental season and strong rental rates. By taking an aggressive stance and marketing appropriately you can indeed make money year to year. But, can you still use it as you see fit? Can you just drive there next weekend and use it if this is your plan? Obviously, there is a conflict. You can’t have it both ways.
On the other hand a true real estate investment should achieve the goals of security of capital, appreciation of principal and cash flow. Simply put, it pays you money and goes up in value at the same time, (not to mention the tax advantages on depreciating commercial property- after all- it is a business investment.).
Of course, not all of those goals are always realized simultaneously. But that is the plan, the expectation and the protocol utilized in selecting your commercial investment property.
That is what a real estate investment should be: a carefully selected asset that goes up in value and puts money in your pocket along the way. So, please when I see you at the next social function don’t tell me about the great shore house investment… because usually it’s not.