Anything good becomes bad if done or taken in excess of what is necessary. Example: eating is good for the body if is done in moderation. However if you eat in excess of your body’s needs it is gluttony which has a negative effect on your health.
Similarly, in investment, it also needs moderation no matter how secure is the investment vehicle. Financial Planners usually advise their clients to “diversify their investments,” or “not to place their eggs in one basket” meaning, invest a little of everything that has a potential of yielding good investment returns.
Real estate is considered a good investment because it steadily increases its value for years from the severe recession of the late 80’s and early 90’s.Though it is relatively a safe investment, there is still a risk of losing your money if you do it excessively.
A good example of a bad real estate investment was a person who owns his residential property. Realizing that the equity of his detached home builds up steadily every year, he decided to purchase a condominium for rental purpose. The condominium was rented and his tenant paid rent on time. So far so good! This time, he was fully convinced that real estate investment was really great.
Taking advantage of low interest rate, he purchased a brand new condominium again for rental purpose and sell later. He made a deposit of $10,000.00 with a closing date a year later.
In the meantime, his one-year lease with his condominium tenant expired and the tenant did not renew the lease for he purchased his own house. The condominium was vacated and listed for rent. Four months had passed the condominium was still not rented. Meanwhile, he had to pay the mortgage, utilities, property tax and condominium fee from his pocket. He did not anticipate that this would happen to him. He ran out of cash and decided to sell the condominium property for he had a problem of getting a tenant.
The property was listed for 90 days and there was no buyer. He defaulted his mortgage payments until the lender issued power of sale.
He already took out the equity of his residential property in a second mortgage for down payment of the brand-new condominium and for the payments of mortgage of the other condo after his tenant left. Nowhere to go, he finally decided to file a consumer proposal. As a result, his condominium was taken by the bank, and his deposit on a brand-new condominium was forfeited by the builder.
Real estate investment is good, but in the above scenario, the person’s dream of accumulating wealth through investment in real estate was evaporated because he invested too much on it --more than he could manage. It would be wise not place all your eggs in one basket – diversify your investments.
Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.