We share an interesting article of Apertura.com where Mariano Capellino, CEO of INMSA, explains the most common mistakes made by real estate investors.
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The10 most frequent errors made by real estate investors
The purchase of property has been one of the mechanisms mostly used by Argentine people to invest their money. In general, this decision is based on the criterion that they will preserve the value of their capital but, in most cases, they make the investment based on assumptions of beliefs which hardly ever repeat. Mariano Capellino, CEO of INMSA Real Estate Investments Company, demystifies ten beliefs investors usually fall into when investing in real property.
1- Believing that the successful experience of purchasing property which was subsequently revaluated will repeat endlessly
It is not the case. In general, after several years of strong appreciations in a certain market and type of asset, revaluations start to reduce. In order to sustain good profits, it is necessary to move from one type of asset to another in the same market or directly get into another market during the right cycle. There is no magic.
2- Believing that capital is never lost when investing in real estate
It has been proved that, at times, assets may experience strong declines in their values and if disinvestment is the option, the investor must be willing to assume important losses or wait for a long time until the value is recovered. For instance, in Miami, in the year 2009, property by the beach or in Brickell experienced a 50% drop of the value reached in 2007.
3- Believing that off-plan purchase system is always good business
Actually, everything depends on the market situation. In Argentina, this business is directly associated with the USA dollar value. It is estimated that US$500 per square meter is the top construction cost for a safe investment. Any higher amount would mean that, in the event of some exchange rate correction during the project construction process – usually up to 24 months- might obligate the investor to sell under the value invested during the pre-construction period.
4- Believing that premium property and the best locations are the most attractive and safest assets.
This is not an absolute truth as it will depend on the purchase time. Each type of asset – categories A, B or C, from the higher to the lower value, based on their location and type of construction – has its opportunity time. In general, premium property in the best locations are the first ones to be revaluated after a crisis period, as they are demanded by foreign investors and people with high spending power. But when they reach their historical value and they remain stable, they are no longer a good deal and opportunities start for class B or C assets – of lower level in peripheral locations which usually receive better revenues from rent. For that reason, the period of time more convenient for buying and selling must be known.
5- Believing that you need to construct in order to make money in this business
It has been proved that there is a high learning cost involved and that strong economies of scale are required for construction purposes. Furthermore, to generate high sustainable profits over the time, the investor should move from the construction of a certain type of asset to another and from one market to another, taking advantage of their cycles. Let construction experts do that part.
6- Purchasing property and never selling it
It has been proved that purchasing an asset and keeping it in portfolio for the long term result in very low return. This is so because all markets undergo different cycles and therefore when an asset is maintained permanently, profitability has an adverse effect when the market collapses and no profit is reflected when the market experiences fast growth. For that reason, the best return is obtained by maintaining the asset when price upward curves are stronger and selling it when price start to remain steady. With the proceeds, another property undergoing some value acceleration process should be purchased.
7- Believing that return is based only on revenues from rent
In order to understand the true annual return of a real estate asset, it is important to consider all revenues and expenses involved in the real estate operation. While doing so, don´t forget to take into account the commissions you pay in each stage of the process, taxes, remodeling expenses, if any, and maintenance costs as well. In general, people compare the sale price plus revenues obtained from rent against the purchase price and don’t include many expenses which substantially reduce the profitability.
8- Believing that purchasing with guaranteed rent is a good and safe deal
In general, those guaranteeing the returns of a real estate operation consider an artificial rate – for instance 8% annually and for a limited period of 36 months- to make the operation more attractive. But, undoubtedly, in order to compensate the guarantee cost, the asset price will include an extra charge which sooner or later will have an adverse effect on it. Once the guarantee period has elapsed, the return will generally be lower – e.g. 4% – and when the investor tries to sell it, he will probably be receiving an amount lower than the money invested.
9- Believing that the purchase of real estate from banks, auctions or developers is always a good deal
It may be successful but it is necessary to have more knowledge and experience than for a traditional acquisition process. Many investors think that by simply buying through these means, they are paying prices under the market value but instead, in most cases, they are buying at higher prices and this is proved by public statistics.
10- Believing that revenues from rent is simply obtained by taking the rental value less the property tax
Actually, it is necessary to take into account many variables which will finally have an impact on the return. For example, vacancy periods, insurance, income tax, property tax, maintenance costs, real estate agency commissions, unforeseen expenses, administration costs, personal assets tax, etc. Upon deduction of these items, the theoretical profitability generally informed by real estate agents is almost halved.
To conclude: “When we do something successfully, we try to repeat the experience. It stands to logic. But this is not the case when investing in real estate. Everything will depend on specific situations of the market and the sector. For that reason, each operation requires some careful analysis if the intended purpose is to achieve some consistent profitability. Do not make these mistakes, don´t stick to beliefs which will only affect your investment”, said the expert.
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