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The following information on real estate investment comes from the book “THE PRINCIPLES OF REAL ESTATE INVESTMENT”

  1. The impact of leveraging
  2. Example of an analysis of a comparable sale (1) (1)

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Introduction

Real estate investment is comparable to stock market investments and treasury bonds. For the serious investor, real estate represents a reasonable and calculated risk and is a good investment to hedge against inflation; revenue and expenses fluctuate regularly similar to inflation.

From 1987 to 1990, many people bought real estate more for speculative reasons than as investments. The investor is the person who envisions owning the property for a mid to long term period, while expecting an annual yield on his investment; he expects positive annual cash flows. On the other hand, the speculator is a transitory owner who hopes to gain value-plus in a short time frame (generally six to twelve months to two years) in spite of potential operational losses (negative annual liquidity) and who hopes that the increased value will compensate for his eventual losses.

The recession of the 1990s hit the real estate market hard and it was during this economic decline that we distinguish between the two types of owners. The recession allowed for the “cleansing” of the real estate market by eliminating the speculators. The financingbanking institutions were the ones most affected by the loans to speculators; the value of the properties for which the mortgage loans were secured were often too high and the net operating revenue was insufficient to cover the debt and operational costs. The position of the speculators is disastrous for the real estate market because they do not have a long term vision and neglect by choice or for lack of liquidity, building maintenance and service to tenants. The significant presence of speculators in the real estate market at the end of the 1980s was detrimental to many cities like Montreal, where apartment buildings are old and in need of regular maintenance and large investments. Seen in this light (the demise of the speculator), the recession had its good side.

Since 1998 vacancy rates of apartment buildings have dropped at the same time as interest rates which has had the effect of increasing revenue and decreasing financial costs. Those who bought revenue-generating properties between 1998 and 2000 (when the hi-tech speculative bubble was the rage) are currently reaping good yields. Those who buy in 2003 at much higher prices hoping to make easy money should beware. When interest rates and/or vacancy rates will climb, those who paid too much in 2003 will not make a profit. There are certainly still opportunities in the market but one must search for them.

The serious investor will pay the price that will permit him to realise an annual yield while allowing him the possibility of maintaining his building. The value of the building depends strongly on the net revenue that is generated, which is closely linked to the quality of the building, the management, the maintenance and the environment.


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