Mistake People Make With Real Estate Investment

by Ravipal Atwal
Mistake People Make With Real Estate Investment

There is always demand for housing, people need a place to live and real estate prices in my city will never drop, I am sure of all this nonsense, especially from people living in Toronto\Vancouver. But things change in the blink of an eye and people realize how big a mistake it is by investing with the wrong strategy in Real Estate. 

Let’s start few years after the 2008 recession 

People realized that buying a house prices are low and it’s a good investment because they can rent it out to cover the mortgage and house prices always go up and they can also take equity out through refinancing.

Lot of investment gurus started selling this idea and people started investing in the house market and started selling them in a short period for profits. 

Other people noticed that it makes quick profit to buy and sell house and they started doing the same thing, which created strong demands for houses in the market but it takes lot of time to build a new house, so there are not enough houses in the market and short supply pushed the prices to crazy level with this fake demand. It seems like people can’t live without a house anymore and it’s the best investment, nothing can ever go wrong.

Mistake My Friend Made

My friend, Mr X realized that he is missing out and started feeling a lot of pressure to buy a house because everyone is talking about it and they are making crazy money. 

Eventually he bought a house for $1.2M in a hot market which was selling for $500K 2 years back, he beat other 10 offers by offering $100K more, he didn’t even verify if house is in good condition, may be house has major issues or not and he borrowed money to pay for the house. 

I asked him if rents will cover his mortgage and his response was that in Toronto people don’t invest for rents, he is going to make crazy money with Appreciation.

He didn’t even have all the money for downpayment, he took a second mortgage at 12% to cover that.  

His main focus was that he can sell the house in few months or so for $1.5M with profit of $300K. 

All of the sudden inflation came, interest rates went up and it’s difficult to get loans. People are scared now and want to hold on to their cash and also they can’t afford to buy these expensive houses anymore and the price of houses started to drop. 

Now Mr X’s house is worth $800-900K only but that’s not the worst part only, This house doesn’t produce enough rent to pay the mortgage. And he also needs to pay taxes and insurance and his mortgage payment keep going up every month with every interest rate hike because he has a variable rate. 

Eventually, with no buyers, people will have to sell the houses for much lower prices if they can’t make higher monthly payments. 

Mr X is stuck now, his house has lost huge value and he has to pay a lot of money from his pocket to cover the mortgage, it will take at least 10 years to recover the prices and he will have to keep paying till then. 

Biggest Mistakes People Make with Investment

  • Buying a house for appreciation is almost the same as gambling, there is no guarantee that prices will always go up.
  • Any particular investment, if it’s already in news, it means it’s too late to INVEST, you can’t make the same money people are already making. If you buy at this point, there are good chances that you will lose money.
  • Blindly believing Specialists, News, Realtors; People will tell you that there is no way real estate prices can drop for any particular reason like immigration or whatever but right ingredients like Inflation + High Interest rates can make any real estate fall.

Ideally, you want to buy house which at least covers all it’s expenses and leaves you with some extra money, so you can be safe if expenses go up.

I hope you enjoyed this story and won’t make same mistakes, if you did, please don’t forget to like and subscribe.

You may also like

Leave a Comment