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4 Real Estate Investing Myths We Will Never Hear The End Of
When you sell vegetable in the wet market, you will talk about how healthy they are and everyone are not eating enough vegetable to be healthy. When you are a banker, you will state that other people’s money and high leverage is the cornerstone of any successful investor or business owner. And when your livelihood correlates to rising real estate prices and more transactions happening, you are going to champion properties as the only form of investment that actually make sense.
For some reason, I get reminded of the constant trumpeting of real estate investments when attending some of those “guru” seminars. But of course, everyone is entitled to their own opinion. And the good thing about opinions is that they do not have to rely on verified facts or figures. Someone can very well insist they are holding onto a good stock even though it’s price has been going down for the last 6 months. It’s a matter of opinion.
This leads us to the statements that we hear over and over again all over the place that neutrals often roll their eyes upon hearing. Surely you know what they are. Are they myths? You decide.
Myth 1 – It is now the best time to buy property
This is a statement often made by “gurus”. It is as if they are expected to mention it to sustain their reputations. No matter it is currently an economic boom or downturn, it is always the best time to buy. And the best properties to buy are often the condominiums they are promoting somewhere.
When interest rates are low, it is a good time to buy with cheap financing. You will be able to borrow to the hilt and build your own little empire. And when interest rates are high, it is a reflection of how well the economy is doing. It is therefore the best time to buy and ride the wave of irresistible inflation. It seems that no matter what the situation is, prices have nowhere else to go but up and it will always be a “once in a lifetime” opportunity to invest in more real estate.
The reality is that no one is able to time the market. Even the most famous investors attribute their midas touch to an element of luck when they time their investments right. The best time to buy is actually when you are ready financially and mentally to do so. This was how it was in the past, it is how it is now, and it will still be so in future.
Myth 2 – Real estate is the best investment vehicle
If you use your trusty financial calculator and churn out all the number into an Excel sheet, even the harshest of critics will have a hard time denying that real estate have one of the highest return on capital you can find in any form of investment. And this is because they are true – on the surface and on paper.
Because nobody mentions the $5,000 you have to spend on a new roof, the monthly energy-sapping chase for rental, the odd hours manning your 24hr-hotline, etc. These are real commitments that need your hands-on attention time and again over a period of time to see your investment blossom. And let’s not forget the closing costs for purchase and sale. If we put these into perspective, real estate can actually be bad investments.
If you bought a property for $250,000 years ago and can now sell it at $500,000, it is so easy to tell all your friends about the 100% returns you have made on a house. Take your down payment of $50,000 into account, and you can actually claim that you have made a 1000% gain! Of course, it would then be convenient to avoid mentioning the $80,000 you spent on renovations, the 6 months that your property went vacant, the amount of property tax you have contributed to the government, and the interest that you have paid on your mortgage. If you put all the number into perspective over the long term, you would be lucky to actually be better off financially. And surely you want to avoid talking about the embarrassing way tenants treat you that has taken a toll on your mental well-being. The amount of personal time you are left with after fulfilling your obligations as a landlord is best kept secret.
If I can make a 100% return for clicking a few buttons and making a few phone calls compared to making 500% return by sweating it out day-by-day for months or even years, I would choose the former any day.
But don’t misunderstand this. A house can be a great investment. But it is surely not the type of home run that so many people proclaim it to be. Not all the time anyway.
Myth 3 – Buy a house instead of helping someone else pay for their mortgage
The notion of paying for something you actually own rather than helping someone pay for what they own is easy to comprehend. When you buy a house, the monthly payments you make go towards the equity you have in the house. While you will be building up someone else’s equity by renting a home.
Although that is a very pragmatic line of thought which cannot be ridiculed, remember that there are many advantages of renting as well that home ownership cannot offer. The biggest one is that you will not be carrying a heavy baggage with you. You have the freedom to move anywhere you want to instead of being tied down to a place with a 25-year mortgage at the back of your mind all the time. Removing bad neighbours, useless amenities, dangerous neghbourhoods, etc, is just a relocation away.
Being a tenant also means that you will be free from the dirty work of managing a house yourself. You are the landlord’s paymaster and can make ridiculous demands on him. The type where you are afraid of making on your father while you were living with him. Repairs for lighting, plumbing, and electrical issues are just a call away. All you need to do is pass on the responsibility to the landlord. Life does not get easier than this.
You might feel that being a tenant means that you will always face the prospect of rental increases. But you are not alone as home owners face rising taxes and management costs as well. You are not really on the short end of thing when you are renting.
Myth 4 – Home ownership comes with tax benefits
Although mortgage interest can be deductible in tax returns, most people overestimate the weight it carries. People often want to take advantage of this just to get one over the IRS rather than do it based on pragmatic calculations.
The interest we are talking about are not guaranteed 100% tax breaks as a lot depends on the tax bracket that you are slotted into. You should check with an accountant to fully realise the amount that you can actually save in reality. You need to see it from a real qualified professional to believe it. The answer might shock you.