Is buying a house always a good investment ?

Is buying a house always a good investment ? I would state that sometimes it is, but often times it isn't...

This is a really tough one because it goes a little contrary to what is normally defined as a good purchase with regards to real estate. To begin with not all real estate purchases are good value. If we take out our calculators and start doing some simple math we soon come to the conclusion that most houses are overpriced.

Here is a simple scenario to illustrate my train of thought...

You have a house that is being sold for $320,000 ...
It's a rental property and we'll assume for the purpose of this example that it is a duplex. Let us assume that the two units will be rented at $900/month.

Let's assume that the taxes for this property are $2500
The heating is $3000 yr and insurance is $500

Total rental income for the property is = $1800*12 = $21,600

Normally you should account for only 75% of that amount in order to account for vacancies so that means that you should consider a rental income of $16,200. However, we will leave it at $21,600 in order to illustrate my point.

Let's also assume that you are going provide minimal maintenance on your property and allocate no more than $2500 a year for upkeep or renovations.

Okay so now that we have all those figures, when does this property become a worthwhile purchase.

Here are our figures...

Rental income 21600

Expenses
Taxes 2500
Heating 3000
Insurance 500
Upkeep 2500

TOTAL expenses $8500 / positive cash flow is $21600-8500 = 13,100

$13100 is the equivalent of a mortgage payment of $1100 a month.

How much of a mortgage (35 year amortization at 4%) will you have for a payment of $1100 ... the answer is $250K ...

So if you purchase this property for $320K and you give a $70K downpayment and you have $0 defaults on the rents that you collect... you are going to have a house that is going to break even and bring you $0 zero dollars of positive cash flow.

The purpose of buying a rental property should be that it provides residual income. In order to provide residual income you would have to either pay less for the property or put more of a downpayment.

If your mortgage were of $230,000 your payments would be $1012... which does give you a positive cash flow of $88 a month at which point the decision to buy this property becomes a possibility.

Now that we have determined that your maximum amount for this property should be $230,000... the remainder depends on how much you have available to give as a downpayment for the purchase of the property.

I consider that $320K is overpriced.

If by any chance you are like most of my clients and you wan't to put as little as possible as a downpayment in order to purchase a property you are in for a surprise and you will definitely have to take some money out of your pocket in order to finance your purchase and cover your mortgage payments on a regular basis. The only alternative given the price of average duplex is to give a substantial downpayment in order to bring your mortage down to $230,000 or lower if possible and that is not always a possibility for most clients.

If you consider that the average price of a duplex in Montreal is now above $300,000 you can therefore come to your own conclusions as to whether the price is warranted or not.

Well this my 10 cents worth on this topic...
What do you think ?