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Real Estate Can Be The Most Troublesome Investment To Be Involved In
When it comes to investment options, there is a lot of prestige associated with real estate. Because for many reasons, people tend to think of real estate investments are something more ‘real’ than other investment vehicles like stocks and bonds. There is a certain psychological certainty and a certain level of assurance one gets when one can drive over to the location of their asset. See it as a tangible object and claim ownership to it. You can always have a place on the map to point to and tell your friends as your very own property.
Unlike other types of property, land doesn’t go out of style. As the population and out average lifespan increases, your property’s appeal and value increases with increasing demand. Finally, nobody can physically take your property away-unlike an expensive Andy Warhol print or Ming vase. The legalities around it makes it easy for you to claim it as yours without any reasonable doubt. With all that said, there are serious reasons why real estate is the most problematic or troublesome investment option out there.
The recent real estate meltdown and what it means
As solid as real estate may seem, on the macro level, its value is driven by credit markets and overall market sentiment. Does that sound alien to you?
When central bank lending policies and interest rates change for the worse, real estate is one of the asset classes that gets hit hard than others. How hard? Very hard. The sad truth is that much of real estate’s inflated and fast-growing value is often due to the availability of cheap credit. Cut off this supply through, say, currency devaluation, stock market crashes, or inflation-fighting policies by your local central bank and interest rates can shoot up making owning one untenable.
Once interest rates creep up (or zoom up in many cases), many home buyers who previously could ‘afford’ to buy homes are now effectively blocked from buying or owning homes. This can send shock waves throughout the larger macro market and trigger sell-offs to avoid miserable foreclosures. These are the patterns and warning signs the Great Recession and financial crash of 2008 brought to the table. We would all do well to remember how the financial crash played out because it dramatically shows the severe weakness of real estate as an investment option.
Traditional drawbacks of real estate
While the vulnerability of real estate investments to financial market-triggered sell-offs and depreciation is this investment option’s most dramatic weakness, real estate also comes with a basket of smaller drawbacks. These drawbacks are quite traditionally evergreen and aren’t going to disappear anytime soon. You will not be able to wait it out or run it off.
First, and most obvious, it takes time to unload even the best properties. It is a classic law of the marketplace. You won’t be able to sell it today and get cash on your hands unless you are playing at a totally different level which is out of reach to the average individual. At the very least, you will have to wait a month or several weeks to unload your property. By that time, other surrounding properties’ values could have further driven your pricing down.
Another problem with real estate is that it is a slave to location. As the old saying goes, the secret to success in this industry is location, location, location. This is a serious drawback since each house must be looked upon as unique. Unlike trading in gold or stocks where you can be sure that the price is knowable and predictable, due to the unique nature of real estate locations and their impact on price, you might not make as much money off your property even though it is near an ideal solution. These small location changes can make a big difference to your bottom line.
Third, you can’t just buy house and let it lie there until you unload it. You have to pay property taxes. That’s right-to add insult to the injury of buying real estate which you might later become ‘under water’ on, you still have to pay property taxes. Depending on the state you live in, these taxes might set you back big time. Imagine not generating any cash flow from your investment and having to fork out expenses like these.
Then there is the mortgage to repay each month. An expense that you absolutely cannot afford to take a break from. The bank is like an oversized big brother you don’t want to get on the wrong side of. They can make your life a misery, and that is putting it lightly.
We haven’t even talked about the costs of maintaining a house. If you do not have any tenants, then all the more you have to spend money to upkeep it so that you draw in more prospects. It’s a catch 22.
Finally, if you choose to develop your property, you have to pay for the upkeep of your property as well. At the very least, you don’t want vandals to turn your property into a crack house. You have to pay for management services. You have to pay for repairs from wear and tear. You have to pay for replacements or even upgrades. As you can see, you have to continuously pay these while waiting for your asset to appreciate enough so you can unload it. These are some things that rookies tend to put little significance on until they go under.
Real estate as an investment portfolio diversification play
Considering its weaknesses, the best use of real estate is to help diversify your investment portfolio. You get protection from inflation and you get psychological benefits. Just make sure you keep real estate’s drawbacks in mind when planning for the long term. Putting all your eggs into this basket can be a shrewd move if all those eggs are golden. But when you are not certain of whether the holdings you have accumulated in your portfolio is highly valued, you could be taking on more risks than you bargained for. The type of risks you could have never associated with real estate when you first started. This is probably why even though many investors are jumping on this bandwagon, just as many are leaving it without ever looking back.