A friend told me he just bought his second revenue property.
"I'd like to give all this away one day," he said, pointing to the pile of paperwork that inevitably comes with running one's own business. "I'm hoping the tenants will pay off the mortgages for me."
My friend is in his early 50s, and his wife works with him. Their two sons are still in school and occasionally help out in the business, "although I wish they would do more so I could pay them more and shift more income into their lower tax bracket," my friend says. Such income-splitting allows the boys to then pay for their own clothing and similar personal expenses with lower-taxed dollars than if their parents paid, which is a strategy that can save the family up to thousands of dollars over the years. But back to the real estate investing. "Many individuals have grown rich through part-time involvement in real estate, probably more than have done so through the stock market," says Pat McKeough, publisher of The Successful Investor newsletter series, in one of his online pieces.
"However, that's mainly because of three key factors that are easy to overlook: leverage, higher risk and sweat equity," he notes.
In other words, it's usually easy to borrow a large part of the price of real estate, which can work for or against you, depending on which way prices go.
Other risk factors include the costs of buying, managing and selling the property, as well as changes on the street and in the "hood," from unpleasant neighbours to altered zoning.
Sweat equity includes dealing with tenants, maintaining the property, doing the accounting and other paperwork, and so on.
Paying others to do this can get expensive.
"Owning revenue property is a cross between an investment and a part-time job," explains McKeough.
You can make money, but be prepared for the risks and work.
And consider commercial, even industrial, property as well as the various types of residential property. The rules and risks are a bit different, but could be a better match for some investors' temperaments.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email: [email protected]
