Four mistakes you should consider to avoid spoiling a real estate investment

Investing in property is still one alternative for investment. But, don´t get it wrong: buying property is not the same as making an investment. In general, people buy properties assuming that they are investing but they are not.

Below there is a description of the 4 most common mistakes made which result in detriment to a real estate investment.

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It is important to take into account that when acquiring a real estate asset at the market value, the investor loses 10% of his capital in case he wishes to convert it into cash because of the 10% costs involved regarding deeds and sale commissions.

In turn, in the event that the asset has been acquired during a phase of contraction or recession and the investor wants to disinvest, he will have to wait for several years until he can recover the value or be willing to bear big losses. This is usually the case in Argentina, but it can also happen when you buy assets abroad.

For instance, those who invested in residential properties during their pre-construction process in Miami between 2004 and 2006 suffered in 2009 a 50% decline of the value that had been reached in 2007. And, if they didn´t sell in 2014 or 2015, period in which an important part of their value had been recovered, they will have to wait until 2022 to get closer to the values achieved in 2005. This is 17 years at zero rate and this is the United States we are talking about. And if we think about the opportunity cost rate, 50% of its capital will have been lost.

Furthermore, if the property has not been efficiently administered during the possession period, it is possible that due to the low rental income generated by these properties the investor has incurred additional expenses for maintenance purposes. So, nothing is perfect, you must know how to invest, it is not only a matter of buying a property, even in markets which are considered safe.

This is often the case for buyers of properties who acquire the assets at market value and keep them for many years.

Large sophisticated investors build return by purchasing properties under the market value, conducting efficient administration processes to generate maximum rental income during the possession period, and taking advantage of the strongest appreciation rate periods during the recovery and expansion phases of the cycle to subsequently sell them at the most convenient time, i.e. when these rates start to fall.

In general, also individuals consider the sale price plus the rental income obtained compared to the purchase price and set aside many expenses which significantly reduce net profitability.
When projecting this income, it is very important to consider commissions in each stage of the process, taxes, remodeling or repairs expenses and maintenance costs as well.

In general, when an investor purchases a property and earns good returns from the revaluation of the assets over four or five years, the investor will naturally seek to repeat the same investment operation assuming that the same result will be obtained. However, this rarely happens in real estates.

It usually happens that after several years of strong appreciations in a certain market and type of asset, revaluations start to decrease, and even in the correction and recession phases, rates turn negative. In order to sustain good returns, it is necessary to move from one type of asset to another in the same market, or access another market in the correct phase of the cycle.

There are innumerable statistics in USA, Spain and other countries worldwide -even Argentina- which prove that passive investments, i.e. keeping a property for a long time, for 20 years or more, the actual appreciation, discounting inflation, tends to be 0%.

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Now, there are moments in which appreciations reach more than 10% annually and this takes place in the recovery and expansion phases of the real estate cycles, therefore, the key is to benefit from theses windows and then move to avoid spoiling the value that has been created.

In fact, when calculating rental income, in addition to the real estate tax, we should consider many variables which end up impacting on the returns. For instance, vacancy periods, insurance, wealth tax, property tax, maintenance tax (building expenses) paid by the owner in countries such as USA, real estate agency commissions, allowances for repairs and contingencies, administration fees, etc. When you include these concepts, the theoretical profitability promoted by the real estate agents is halved or even lower.

On the other hand, it is highly important to make sure that the rental income and all the above mentioned expenses and fees are consistent with the market value and rental terms to be minimum, since having a property vacant for more than one month and bearing high costs make the projected rental income become drastically reduced even reaching zero or negative levels.

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Source: Ámbito