THE WORST ENEMIES OF REAL ESTATE INVESTMENT.

 

It is commonly said that investing in real estate is a synonym for investing in a patrimony guaranteeing financial security for your loved ones in the years to come. However, if that investment stays static over time, it would hardly generate the economic benefits you are expecting to assure the future of your family.

 

Most property owners looking to become real estate invertors purchase land and buildings… But willingly chose not to sell them for a long period of time. Actually, some of those properties don’t make it to the market. Doing this is the best way to avoid earning a high and sustainable ROI from your real estate investment over the years.

 

Real estate investment is a business. And like any other good old business, the key to maintain your costs low is buying properties under market value. Nonetheless, is hard to do this without being a sophisticated investor due to the high transactional costs associated to real estate investment.

 

However, during the sale – a process perceived as easier – a lot of investors make one of the biggest mistakes of real estate investment: not selling at the right time. This mistake has a deeper impact on the ROI, even higher than buying properties over market value.

 

But as mentioned before, this isn’t the only mistake made by those investors wishing to increase their ROI. There are numerous myths between investors to abstain themselves of selling their properties. We listed some of the most common, those that have become the worst enemy of any real estate investor.

 

Not knowing your current ROI or the potential of your investment

 

Most people work long hours to save enough money to buy a property and pay its mortgage on time. Once they become a property owner, however, they chose to focus on saving more money to buy another real estate and keeping the old property, accumulating real estate, instead of maximizing the ROI of their current property.

 

Not maximizing your ROI has a significant impact on your personal finances. An effective management of a real estate investment has the potential to multiply 10 times its market value in a period of 20 years. On the other hand, a passive management – buying without selling – can only double the market value over the same amount of time.

 

Still not convinced about selling your old properties?  Here is another interesting fact: it takes around 150 years for a passive investment to multiply 10 times its starting market value.

 

Unlike financial investors, real estate investors seem to be satisfied with finding a haven for their capital invested in properties, sheltering themselves from inflation, and not worrying about doing a yearly follow up of their ROI.

 

Most real estate investors can’t answer what was the yield of the capital they’ve invested in properties over the last year. Calculating KPIs like this one to compare with other investments alternatives isn’t a common practice for them. Ignoring KPIs help an investment to stay static and earn low ROI over time.

 

The real estate market is characterized by cycles that last between 15 and 20 years. In every cycle, there’s a five-year window for every market and type of property in which every property has a market value above an annual 10%. However, it’s important to have some local guidance to identify the current phase of the market’s real estate cycle and decide whether to buy, keep or sell a property.

 

It is recommended to take advantage of the phases of higher value of a property by investing in different real estate in different markets in order to transform a traditional cycle – always ending at the same point – into an infinite ladder.

 

Keep in mind that the key to any investment is to buy cheap and sell expensive. Real estate investment isn’t an exception.

 

Believing that the value of properties always goes up

 

It has been demonstrated that a property can’t sustain a high market value for over five years.

 

Brickell, the well-known financial district in Miami, is a great example of this. Properties in the area reached a high selling price and selling was easier due to the popularity of Brickell. However, a lot of property owners opted not to sell thinking that the value of their real estate will increase at the same rate in the following years. Nowadays, the Brickell boom is long gone.

 

Thinking that the price of any property, especially those in a trendy zone, will continue to increase is a big risk because you might lose everything you could’ve won in the investment by not selling at the right time.

 

The invisible weight of social ideas

 

“Don’t sell what you bought. If you can, save some money and keep on buying… But don’t sell!” Are you familiar with this? A lot of Latinos have heard this growing up and have passed this idea down from generation to generation.

 

This traditional way of thinking, afraid of big gambling, as well as the social importance given to others’ opinions have become big prejudices that make you commit avoidable mistakes as a real estate investor.

 

It’s normal to think about what others might say if you chose to sell a luxury apartment in Miami to buy a low mortgage house in Detroit. It doesn’t seem like a logical idea. Nevertheless, if you are keeping up with the real estate cycle we have previously talked about, there are some moments in which the best business idea is purchasing premium residential properties in extraordinary locations such as Brickell (Miami), Punta del Este (Uruguay), Puerto Madero (Buenos Aires) y Polanco (Mexico City). But in other times, the better option is buying properties in medium-low class zones because they can reach a high value at selling time in the right phase of the cycle.

 

The real estate business goes beyond the location, location, location preached by the developers of premium properties in that type of areas. Real estate is, actually, a matter of timing, timing, timing following the phases of the real estate cycle.

 

Not knowing the difference between real estate investment and personal property.

 

As you might have guessed by now, a real estate investment is done to earn money with it. On the contrary, a personal property is any land, house or condo purchased with the purpose of living on it or enjoying over vacations.

 

It is important to distinguish between your properties and those that you consider as investment-only properties. If you mix them up, you are increasing your chances of purchasing a property thinking that it will be a great investment when it isn’t suited to earn a high ROI. Not knowing the difference between the two of them makes the active management – the buying and selling of properties at the right time- more difficult to achieve.

 

If you are buying a property for you own personal use, don’t limit yourself: buy whatever you like the most and keep it as long as you want. But if you are making an investment, get in and get out at the right time: don’t be ahead of the market cycle nor wait longer than necessary.

 

Believing that real estate investment is limited to local or international transactions.

 

Another great enemy to defeat is believing that your real estate investment should always remain local or international, and never both.

 

Unfortunately, a lot of people truly see it that way to avoid selling their properties. They don’t find a solid reason to sell because they believe there isn’t any revenue awaiting in selling inside the same market. And they are absolutely right: it doesn’t make sense to sell the same type of property in the same market because it’s difficult to earn any notable revenue.

 

The key, then, is moving between different markets. To increase the rentability of your real estate investment, you should buy different properties in the same market or go to a different one to keep on building rentability. To achieve this, you should also look for realtors in the markets that you find interesting and attractive because they know everything about neighborhoods and properties there.

 

Comfort and lack of knowledge: “Why should I sell? What if I’m wrong?”

 

Researching in depth about real estate investment to make an objective decision might be uncomfortable. But it is important for an investor to be well informed, train themselves and look for the advice of realtors and financial advisers with the objective of creating a realistic context for the potential of their alternatives. Don’t forget that if you don’t do it, no one else will do it for you and the price of ignorance is too high to pay.

 

Fear of exit costs: “If I sell, I’ll lose…”

 

When selling a property in Mexico, the seller must assume the costs of the commissions, deeds, and other expenses. These exit costs are often looked like restrictions for property owners because instead of thinking how much they can win by selling at the right time, they focus on how much they will lose. To avoid this, we recommend you add any additional costs in the operation.

 

Nevertheless, you must be careful with your calculations. Believing that your property has a higher value than the one it actually has can lead you to think that you don’t need to sell. Those unrealistic expectations will make you lose the possibility to sell at the best price at the right time.

 

Keep in mind that real estate markets are adjusted in long cycles. So, if you don’t sell, you’ll have to wait a lot of years before you can value your property at the same price it possesses right now. You must add the cost of the lost chance to this waiting period. Looks bad, doesn’t it?

 

There are a lot of examples of this phenomena in other countries as well as in Mexican cities such as Ciudad de México, Toluca, Querétaro, Puebla, Guanajuato, Guadalajara, Zapopan, Zacatecas, Durango, Gómez Palacio, Torreón, Saltillo, Monterrey, Chihuahua, Tampico, Tijuana, Mexicali, Hermosillo, Obregón, Los Mochis, Culiacán, Mazatlán and Tepic. Lots of investors have earned low ROIs by keeping a property in their portfolio for more time than they should have. Markets go through different phases and keeping a property for that long punishes any positive yield when the market goes down, thus earning a low average only exceeded by inflation.

 

To earn a higher rentability you must keep the property during the recovery and expansion phases of the market because the ascending curves of price are more pronounced than normally. This period usually lasts for four or five years. After this waiting, you must sell before the selling prices stabilize in a flat line.

 

With the revenue of your sell, you should purchase any real estate in the recovery phase. You can usually interchange between different types of properties, cities and countries. This way, you can do an active management of real estate that will allow you to obtain high ROI from your investment.

 

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