When Is It OK To Lose Money?
I’ve got a property which is eating me alive at the moment.
Last year, I sold my only residential investment property. I didn’t want any more properties which cost me money each month. From now on, I told myself, I only want properties which make me money each month. This is one of the reasons I decided to focus on commercial property.
Yet soon afterwards, I broke my own rule.
I bought a commercial property (a child-care centre) for $885 000.
I borrowed 70%, that is $619 500.
I pay approximately 8.5% interest on it, that is around $53 000 per year, to cover the mortgage.
The child-care business is leased out for $31 000 per year.
This property costs me $22 000 per year to own. Ouch! Why did I do that?
I confess that each month, when I have to cough up the interest, I ask myself the same question. It’s not comfortable, owning this property.
But I’ll tell you the reason I did it. The property sits on a big block of land, zoned as ‘Town Center’, in a bustling coastal town. The child care centre occupies around 10-15% of the block. The rest of the block is vacant, and can be turned into at least 8 residential blocks. Blocks are selling for around $170 000 each at the moment.
This means that the 8 blocks should fetch 1.3-1.4 million. It might cost a few hundred thousand to do the subdivision, so all up I should end up with at least 1 million for the blocks. That will put more than $100 000 of profit into my pocket, and leave me with a ‘free’ commercial property paying me more than $30 000 per year for the rest of my life. That will be a good outcome.
It’s a great theory. The only catch is, it’s killing me until I am able to sell those blocks. Sometimes things in property happen slower than you want, and this is one of those cases. It’s almost a year that I’ve been holding this block, and the subdivision process is moving very slowly.
So, should I have bought this property, or was it a mistake? I’m not sure. It’s a learning experience. I don’t enjoy paying out money each month. But if things go as I expect, eventually I will be very glad that I did buy it.
As I’ve said before, even mistakes can make you money, as well as give you invaluable experience. Right now, it’s hurting me. I may not buy a property like this in future, because I don’t like paying so much interest (I prefer to have a tenant who pays it for me). But I don’t regret buying it. It has been worth it for the experience alone.