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5 Detrimental Drawbacks That Motivated Investors Will Not Speak Of
The people who would benefit from a bullish real estate market will always play up the advantages of property investment against everything else. When prices are rising, they would be the ones who say that the wave is just picking up and it is the “best time to buy”. And when the market is declining, they would be the ones who say that the record low transaction that just happened is a one off and in view of the low prices, it is the “best time to buy”.
If we dig just that little deeper, it can be simple to understand why it is forever a “good time to buy”. Realtors need transactions to happen to keep their workforce happy. Sales trainers need a humming market to continue having new agents to train. Gurus conducting seminars need a bullish outlook to continue selling their courses to new investors following the crowd. Promoters of international properties need a feverish market to take investors’ money overseas. And even builders need a rising market to continue selling their developments at hazardous prices that can cause a cardiac arrest.
In truth, there are many advantages of investing in real estate. And in fact, there are many opportunities whether the market is good or bad. But so often, we get fed with so much information on the good things that we forget that there are disadvantages as well. It almost sound like profiting from real estate is so easy that all anyone has to do is buy or attend a $997 weekend workshop and they are well on their way to financial freedom.
Maybe it’s time more attention is given to the drawbacks of real estate as an investment so that investors have a good set of information to make their decisions to get in or out. There are 5 key caveats of properties. Each has the potential of pushing you over the financial edge. Compound them and you could be looking at a devastating storm. These negatives are not meant to discourage you. But to inform you of what you will be up against once you enter this world.
One shot one kill?
If you have ever made a windfall from stocks, you will know that it takes quite a few buys before finally landing that winner. The same with real estate. It is flabbergasting how so many people are being led to believe that a house is more of a one-shot-one-kill type of investment. And because of the financial outlay usually involved with properties, most people actually have just one, two, or maybe three shots at hitting that winner. Let’s leave out the consideration for creative financing as that is a more advanced play and not suitable for beginners just starting to learn the trade.
Yes, you might make money from your one investment property. But you could be asking too much when relying on it to take you towards financial freedom. Very few people hit home runs. And even those who really hit the ball out of the park usually attribute it to good luck. The reason why some people might be able to consistently find winners is probably because they have more capital to work with and take more shots. We hear about the winner, but seldom hear them talk about their embarrassing losers.
It takes a long time to truly profit
The opening sentence from the last paragraph has to be edited. Because that is not the whole truth even if you are generating a rental yield of 20%. At a 20% rental yield, you are just getting a positive cash flow. In reality, you do not make a profit until the money you receive exceeds the money you put in. The money you put in include, your down payment, renovation costs, closing costs, interest on mortgage, professional fees, repairs and maintenance, etc.
Beginners often proudly proclaim that they are profiting simply because they are getting a good yield. They either forget or ignore the additional costs of ownership. And they even forgot about the down payment they coughed out in the first place. Of course, it can be argued that the initial outlay was like a purchase price for a recurring rental income. Just like an annuity from an insurer. If that is the case, you still have to bear in mind that you are not actually profiting until you cover your costs. You could very well churned out a better return by putting your savings somewhere else. Somewhere like an annuity?
A roller coaster
Newspapers and mass media often report on rental yields that look delicious. In theory, all you need to do is buy a house, get a mortgage, and acquire a rental income that will cover the mortgage payments with excess to spare. That is a brilliant idea. The sad part is that that is just theory. We are operating in the real world if you have not noticed.
Rental rates often fluctuate just like any market dictated by demand and supply. You could think that your tenancy agreement states a particular rental should be paid, and it is what you will get. That don’t always happen. It will happen without a glitch on SimCity. But in real life, not always. If a tenant from hell arises and refuses to pay, you have only a few choices. Among them, either you accept a lower rental, go on without payment, chase them out and get in trouble with the law, start the eviction process. If you look at those choices, the most attractive one is actually to accept a lower rental.
In times of boom, tenants will pay more. But the competition to woo them increase. And in times of decline, every landlord could be pushing down prices in order to secure tenants quickly. It really isn’t as easy as how people make it sound. Train yourself to differentiate between theory and real life.
High transaction costs
Real estate is a big ticket item.. And for such highly priced products with so many professionals involved, you can expect snapping jaws aiming at your bank account wherever you go. You could find that your apartment have risen in value in two years. But you might not make a profit from selling it due to closing costs. Other than professional fees, you are looking at taxes and duties as well.
If you have to sell for some reason, you might even have to suffer the irony of booking a profit but actually incurring losses on a sale. And because of the illiquid nature of properties, circumstances can really lead you to make decisions which are detrimental to your finances. With all the effort you put in, that can be really demoralizing.
When you are profiting, you can expect the government agencies to get a share. In case you forgot, it is the money that is left after paying off taxes which can be truly called yours.