An acquaintance who once sold me a car called later, saying he wanted to sell a house and asking to talk.
Only when we met did I learn he already owned five properties.
After the first home went up in value, they refinanced to pull out money for the down payment on the second; then they bought two pre-construction condos; the fifth was a luxury home priced at about $3 million.
Looked at one by one, each purchase seemed to have a reason.
The house went up, so take some money out and keep investing; pre-construction condos don’t carry the full carrying costs yet, so buy them first; then a better home to live in came along, and it felt like an opportunity not to miss.
The problem is that homes can be bought one at a time, but a family’s financial pressure all piles up on the same bill.
After learning about their income, mortgages and finances, I started writing the numbers down on paper, one by one.
Where would the down payment come from? How big was the funding gap? What were the carrying costs — mortgages, property taxes? And how much money would be needed when the two pre-construction condos closed?
Based on what I knew at the time, the mortgage and property taxes on the $3-million home alone would come to more than $100,000 a year. The more urgent problem: the down payment had not yet been arranged.
When all these numbers were laid side by side, they gasped.
Before, every purchase seemed to be about how much they would make in the future. Only when the obligations of several properties were put together did they see that how much they had to pay now also needed an answer.
They then complained that their previous agent had kept encouraging them to buy. Whatever the market, it would go up; whatever the house, it was worth buying — but there was hardly ever a serious conversation about whether they could afford it.
I am not against real estate investing. The point is that investment advice has to be discussed together with the family’s income, debt, cash reserves and ability to carry risk.
“This house has potential” and “this family should buy it” are two questions that need separate answers.
Next time someone urges you to keep buying, ask them to work out three numbers with you:
First, how much cash you need in total at purchase and at closing.
Second, how much you have to carry each month while you own it.
Third, if renting it out doesn’t go smoothly, your income drops, or you have to sell in a weak market, how long your reserves can hold out.
Responsible advice for a family should leave room for “wait a while,” “buy one fewer,” or even “this one isn’t right for you.”
— Ming
