Real estate is one of the most emotionally-attached investment options. People rationalize their emotions with the help of many myths surrounding real estate investing.
These myths must be dispelled to avoid becoming trapped in the emotional side of real estate investing. This article will discuss some of the most common real estate investing tales and attempt to disprove them.
Land is scarce
Real estate agents and others who promote real estate investing believe there is a land shortage. The world has a minimal amount of land. The fact that the world’s population is growing every day leads to the conclusion of an increasing land supply. Land prices will continue to rise because there will always be a shortage.
But a quick look at the numbers will show this is untrue. First, there is only so much land in the world. Technology is making it easier to make better use of this land. These findings are based on studies that have been done in this area. They show that even with an increase of fourfold the global population, plenty of lands is still available for humans to thrive and survive.
Studies have shown that the world’s population is poised to stabilize. This means that the peak of population growth has passed, and the number will continue to grow.
Therefore, the logic of “land is precious and therefore scarce” is the propagation of a myth!
Land prices always go up in value
This logic is common in developing countries, which have seen unprecedented booms in the real-estate sector over the past decade. Land prices have risen ten times in these countries over the past 20 years. People in these countries believe that land prices always rise, i.e., The real estate market always increases in value.
It is not valid. There have been real estate crashes in developed countries like Japan and the United States, where prices dropped by 40% to 50%. The prices in Japan have declined and have remained there for the more significant part of the past decade.
This is why the mythical claim that “land prices always appreciate” is false again. Many factors are linked to land prices, one of them being the economic well-being of an economy.
Past performance predicts future performance
Real estate investors who are hopeful will extrapolate past trends and make a bullish forecast. But, it is essential to realize that the world has experienced a profound shift over the past decade. Emerging economies have experienced unprecedented growth thanks to business arrangements such as outsourcing, free trade, and cross-border investments by multinationals. It seems unlikely that there will be another such revolution in the future. The past performance will likely be repeated with a sudden economic process. Investors who expect a repeat performance will be shocked!
Real Estate Investments Can Be Flipped Easily
This myth is common. But, it was not a common myth before the subprime crisis in the United States. Stories of self-made millionaires in real estate who bought and sold real estate using borrowed money were familiar.
As these bloggers promoted, flipping is a way to make money. You can buy and sell real estate multiple times in a short time. The idea was to convert the profit from the price differential into cash and book it. These self-described gurus should have mentioned the large number of transaction costs associated with real estate transactions worldwide. The more properties you flip, you will incur transaction costs. Depending on the property’s price, these transaction costs can range from 2% to 5%.
Finding a buyer is not only expensive but also time-consuming. Flipping properties is a time-consuming and resource-draining task that should be avoided.
Renting is better than buying
All property buyers around the globe feel a strong emotional connection to the property they buy. Since traditional times, real estate has been considered an “adult” decision. This decision is not financially supported and is motivated by the belief that owning a property makes you more financially secure.
This is not true if you consider the financial implications. In some cases, buying is the best decision. In other instances renting is the best choice. It is up to each patient to decide the best thing to do. In a subsequent article, we will discuss the rent vs. purchase decision.
Real Estate Investments: As Safe as Houses
Investors often refer to a very safe investment as As Secure as Houses. This is the traditional belief that real estate is one of the most secure investment options. According to the old school, real estate investing is risk-free and offers the best protection against inflation.
However, it has been discovered that houses were once more secure than they once thought. This article will discuss investors’ risks when investing in real estate properties. These are some of the most common threats:
Bad Tenants
Many people who invest in real property do so for the cash flow. These cash flows come in the form of steadily increasing rental payments. These cash flows assume that investors will always find good tenants. Good tenants are punctual, pay their rent on time, and don’t damage property or cause other legal problems.
Investors may only sometimes find a tenant who fits their needs well. Most experienced real estate investors consider bad tenants the most significant risk. Even though only a few investors will encounter bad tenants, you could face substantial legal expenses if one does. Real estate investing is a people-oriented business. Landlords should check their credit reports and criminal records before letting their property. This is done to reduce these risks.
Liquidity risks
Real estate investments are likely to be the least liquid of all assets. Real estate investments require a lot of money and a significant commitment from investors.
If you’re a real estate investor looking to sell a property, no available buyers will give you exact quotes. There are very few buyers willing to make such a significant transaction.
Stocks, bonds, and gold can all be liquidated quickly if needed. Real estate can take a long time to liquidate. This illiquidity must be priced to ensure investors don’t make a poor investment in real estate.