The Real Estate “Risk-Reward” Equation

With any investment, large or small, you need to consider the upside gain, and the downside risk.

Investing in real estate is no different, whether it’s a long-term buy-and-hold, or a short-term reno-and-flip.

I’ve been monitoring this property in a very sub-par location for the last year, and it’s finally turning over.  Let’s look at the risk-reward equation, and you tell me if it’s the basket in which you’d place all your eggs…

Maybe this is a case of the “first horse to the trough, gets to eat.”

This property sold in May of 2015 for $857,500.

Only seven months later, the property sold, with OMB approval for a 3,000 square foot house, and permits, for $1,025,000.

The first “flipper” of this piece of land made money.

Jury’s out on the second.

While I can’t say with 100% certainty that this is a “flip,” I can’t see an end-user purchasing this lot.

Either way, the person who purchased this lot, be it an end-user, or a flipper, is sticking his or her neck out.

$1,025,000 for a 27 x 85 foot lot on Mount Pleasant.

And that’s just land value!

3,000 square feet, at the cost to build of $250/sqft, is $750,000.

The OMB approval and permits have already been included in that $1,025,000 cost, but what about land transfer tax on the purchase, legal fees on the purchase/sale, Realtor fees on the sale if it’s a flipper, and the monthly carrying cost.

This, in my opinion, is the very definition of a “risk-reward equation.”

It’s high-risk, put potentially high-reward.  If you can find somebody who wants to buy a $2.5M house on Mount Pleasant, that is.

Call me risk-averse, but I would never consider this, nor would I recommend it to my clients.

To each, his own.

But I have to wonder how many people out there would consider this their “own”…

4 Comments

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  1. Anna says:

    I am currently turning over this in my head. I have a condo thats a lease hold property in a very desirable neighborhood with 55 years left on the lease. I need to sell to buy a home for myself. Someone flipped a unit in the building last year and did incredibly will. I’m not sure if i should invest in a reno to appeal to a passion buyer or not. Otherwise people who buy lease hold condos are looking for cheap cheap cheap and for that reason the condos don’t move. Or do but for amounts that don’t make selling worth losing the rental income it generates.
    Any thoughts?

    Best,

    Anna

  2. lui says:

    Still not as bad as Vancouver.My friend in Port Moody told me almost all of her friends still are renting or living at home after College because they cannot afford even a entry level condo in Vancouver.The salaries in BC isn’t great either.

  3. Cool Koshur says:

    This will be 2M dollar home by the time it is all set and done. This is a busy street with lots of traffic. I wont live here with my family & kids even I am offered to live for free. This noise is amplified during night time making it impossible to sleep. It will be pain for guests to find parking there. Also it is very tricky to pull your car in or out of your driveway/garage. INSANITY !!!!!

    @Franceca you are right, said some cultures are used to living in noisy environment.

  4. Francesca says:

    I always find it surprising at what people pay to live on such busy streets but I find that a lot of new immigrants to Canada who come from countries where they are used to living in very crowded and noisy urban environments wouldn’t worry about living on such a congested street if it meant being in a good school district and residential neighbourhood. In the years we lived in the Yonge and Finch area all of Finch saw redevelopment of singe detached bungalows into townhouses and now a great part of Bayview is being transformed that way. I personally would never buy on such a busy/congested street especially at the current prices which don’t always seem to account for the noise level, but I guess to your point David, not everyone thinks like you and I do. What’s interesting to note is that this house is in an area that so far hasn’t attracted a large number of Asians, Persians, Koreans or Russians like North York so not sure if the people who are building this house will get their money’s worth when trying to re sell after the rebuild is done.

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