- Joined
- Aug 22, 2008
- Messages
- 428
QUOTE What is the obsession with appreciation or depreciation TODAY or within the next year?Are you of the belief that real estate will continue to depreciate for more than 12 - 24 months?If not, then why be so concerned about it. Our plan extends out at least 5 year.I`m pretty confident that our properties will appreciate significantly by then.So, you loose 10% by purchasing today.Obsession? Not an obsession.
My point is that because real estate is usually purchased using leverage, price declines are bad and magnified. Leverage is great when things are on the up, but it`s a real killer when things are on the decline.
You ask why I`m so concerned about it? OK. Let`s run some numbers. You buy a condo in Calgary for $200,000. Here`s a 5-year pattern of what may or may not happen in the marketplace over that period:
2009: -6%
2010: +2%
2011: +6%
2012: +5%
2013: -2%
I`d call that fairly realistic, yes? So, starting with a condo purchase for $200,000 in December of 2008, you`ll wind up with a condo worth $210,000 5 years later. Whoopee. This translates to a whopping annually compounded return of 0.98%, 5% gross. Any investor with half a brain would want to slash your tires with results like that.
Now, let`s do another comparison. Same condo, same price, different results:
2009: +2%
2010: +4%
2011: +9%
2012: +1%
2013: +2%
In this case, you wind up with a condo worth $238,238, which translates to a much better annually compounded return of 3.56%, 19% gross.
Points:
1) Declining prices do matter (unless yield isn`t important to you).
2) This is why I`m not buying in relatively unaffordable places like Alberta, B.C., and Saskatchewan (general term, I know, but you get the point). One or two years of declining prices really kills your investment`s performance.
My point is that because real estate is usually purchased using leverage, price declines are bad and magnified. Leverage is great when things are on the up, but it`s a real killer when things are on the decline.
You ask why I`m so concerned about it? OK. Let`s run some numbers. You buy a condo in Calgary for $200,000. Here`s a 5-year pattern of what may or may not happen in the marketplace over that period:
2009: -6%
2010: +2%
2011: +6%
2012: +5%
2013: -2%
I`d call that fairly realistic, yes? So, starting with a condo purchase for $200,000 in December of 2008, you`ll wind up with a condo worth $210,000 5 years later. Whoopee. This translates to a whopping annually compounded return of 0.98%, 5% gross. Any investor with half a brain would want to slash your tires with results like that.
Now, let`s do another comparison. Same condo, same price, different results:
2009: +2%
2010: +4%
2011: +9%
2012: +1%
2013: +2%
In this case, you wind up with a condo worth $238,238, which translates to a much better annually compounded return of 3.56%, 19% gross.
Points:
1) Declining prices do matter (unless yield isn`t important to you).
2) This is why I`m not buying in relatively unaffordable places like Alberta, B.C., and Saskatchewan (general term, I know, but you get the point). One or two years of declining prices really kills your investment`s performance.