IS A REAL ESTATE INVESTMENT AS GOOD AS A FINANCIAL BOND?

In the April 9th issue of the Wall Street Journal there is a very thought provoking headline;  “New Era, In Bonds; Zero Yield or Less” Tradeweb shows a  government-bond yield for Switzerland of (-1.0%) …yes negative 1% per year.  This means if you invest $100,000 for five years you will receive back $95,000.  This is in part a result of the ECB  European Central Bank charging commercial banks to keep money on deposit.  Banks and Lenders are unable to invest their deposits at a rate greater than the cost of maintaining deposits.

The intended better result for an investor is to own investment real estate.  Even with a nominal annual income, this investment should over a 5 year period appreciate, not depreciate in value.  For example, consider the purchase of a residential condo unit.  If the purchase price is $200,000 and is financed with a loan of $150,000 at 4% interest for 30 years the annual loan cost is $8,593 or $716 per month.  If the real estate taxes and condo fees are an additional $600 per month the total expenses for a 5 year holding period would be $78,960.  If the apartment is rented for $1,000 per month the net cost will be ($78,960-$72,000 =  -$6,960) over the 5 year period.

If the value of the apartment appreciates only 2% per year the value in 5 years will be $220,000.  The investment returns 4.6% per year.  If the apartment appreciates at 4% per year the value in 5 years will be $240,000.  The investment will then return 11% per year.

Sale Price in 5 Years$220,000$240,000
Less: Sales Costs (8%)$  17,600$19,200
Net Proceeds$202,400$220,800
Less:  Income loss$    6,960$    6,960
Less: Mortgage Balance$135,670$135,670
Profit end of 5 years$  59,770$ 78,170
   
Purchase Price$200,000$200,000
Less: Original Mortgage$150,000$150,000
Cash Investment$  50,000$  50,000
Profit$   9,770$  28,170
Yield over 5 years 20%    56%
or Per Year 4.0%  11.2%

 

This return is not without some aggravation and risk.  You will need to rent the apartment and collect rent each month, pay the condo fees, mortgage payments and real estate taxes.  An additional risk you have are increasing expenses and periods of vacancy.

 

But when you consider the alternatives of investing in a savings at rates below ¼ of 1% or less, the risk may justify the effort.  This explains the interest by investors in purchasing condo unit and other types of simple investments.