May 28, 2007 - Purchasing a primary residence can be one of the best investments both financially and personally that one could make however not all real estate investments pan out quite as well. Consider the following investments in real estate which are popular, even trendy, but the end result might not turn out quite as expected.
Vacation or Second Homes
Given the run up in real estate prices over the past decade, vacation or second homes have never been more popular. If you purchase a second home in a resort area chances are you can rent or lease it out when you are not using it yourself to help cover the costs of ownership. Unfortunately few second or vacation homeowners go to the trouble of renting or leasing their treasured properties and as a result they do not receive sufficient income to offset the sizeable expenses involved in ownership. Therefore the property can easily become a financial siphon rather than a positive (or for that matter even a neutral) cash flow generator. A vacation or second home should be considered almost exclusively a luxury expense and is not normally a good investment for most people.
Timeshares
A timeshare is an arrangement whereby parties agree to share ownership of or the right to use a property over a specified time period. A time share allows you to buy one or more weeks of use (or occupancy) of a specific unit or a unit within the network of a resort or hotel chain. Unfortunately the decision to purchase a timeshare becomes an impulse buy for most people while they are in the middle of enjoying a luxury resort vacation experience and are then offered the opportunity to re-live that same vacation on an on-going basis. Purchasing a timeshare through re-sale is likely the most cost effective way of doing so if you are convinced that you must have one. Many current owners of timeshares who have already paid the high up front commissions and fees and have now tired of spending their vacation in the same location every year are more than eager to unload their timeshare interests.
Real Estate Limited Partnerships (RELP)
In a RELP a group of investors pool their financial resources to purchase property. The resulting transaction creates both limited and general partners. The general partners manage the investment property for all the investors and distribute the pro-rated share of profits to each investor. Because ongoing management fees and commissions tend to be high and RELPS are not publicly traded the returns have only been mediocre at best. Also investors in limited partnerships may be required to make future contributions as required by their formation agreements known as master limited partnerships. Unfortunately RELPS tend to end up working out best for the managing partners and few others. In a limited partnership you will likely have a high opportunity cost of investing and may easily find better returns under more liquid, hence lower risk, conditions elsewhere.
