The main pattern that unites almost all those who invest in real estate is that they buy a property and never sell it. This pattern is the number 1 enemy to obtaining high returns sustained over time. As in any business, buying well, that is, below market value, is key, even more so in real estate investment, which has high transaction costs, although it is true that it is very difficult to achieve this without being a sophisticated investor. But in selling, a process that is usually easier, is where investors usually fall into the trap. And the name of the trap is not selling at the right time. This error has a negative impact on performance, even much greater than that of buying poorly.
There are several myths that have taken root in investors that make it easier to fall into this trap. These are the most common ones:
1. Believing that bricks always go up and never down.
It has been proven that if a property achieves a strong appreciation for more than 5 years, it is difficult to maintain this.
The problem is that when the property is at a very high price and although it is easy to sell it since there is generally a lot of demand, most people do not sell thinking that the value will continue to grow at the same rates. And that is where the big mistake is made.
Remember what happened in Argentina in 2001. Before that, real estate prices had reached very high levels. With the crisis, their values plummeted by an average of 50%, although they later recovered and surpassed that value.
But what would have happened if you had sold before 2001, for example in 1999 or 2000, and with that money, bought a property in Spain or the United States and then sold it in 2003 or 2004 to buy again in Argentina? The magic of the real estate cycles would have allowed you to buy again in our country between double and triple the amount of properties you had in 1999. A great deal that would have been achieved through an active strategy versus the traditional passive strategy of keeping a property without rotating.
2. Not measuring the performance achieved or its potential. Nor comparing it with other investment alternatives to decide what to do.
Many people put in a lot of effort and hours of work in their different professions and activities to gather enough money to buy real estate. But in most cases, after achieving this, the focus is not on maximizing the return on that capital. Instead, they think about generating enough money again to buy another property and maintain the previous one.
The impact of not taking care to maximize it is very significant. By efficiently managing a real estate investment, you can multiply the invested capital by 10 in 20 years. If you do passive management, that is, buy and hold without selling, you can only double it. Another interesting fact: with a passive investment it would take more than 150 years to multiply your initial investment by 10, while as we said, with active management you achieve it in 20 years.
The real estate investor seems to be content with seeking a refuge for his capital invested in real estate and to protect himself from inflation. And he does not monitor the performance obtained year after year as he does with financial investments.
When we ask an investor what the net return of the portion of his assets allocated to real estate investment was in the last year or the last 5 years, he will hardly be able to answer. One of the reasons is that there is no culture of doing so and, on the other hand, he is unaware of companies that are dedicated to managing this type of investment professionally, as is the case with financial investments.
It is very important to know that every 15 to 20 years that a cycle lasts, a window of opportunity opens that usually lasts 5 years for each market and type of asset in which a property appreciates very strongly, in some cases more than 10% annually. Therefore, it is very important to be clear about what phase of the cycle one is in to decide whether to buy, hold or sell.
The key is to always take advantage of phases of strong appreciation, but to do so it is necessary to move between assets and markets. This allows a traditional cycle that always ends at the same point to be transformed into an endless staircase.
As with any investment, the important thing is to buy cheap and sell high, and real estate investment is no exception to this premise.
3. Not distinguishing between real estate investments and properties for personal use. In the former, one does it to make money, in the latter, to enjoy.
It is important to separate properties for personal use from those for investment purposes, since by mixing them, it is very possible to make the mistake of acquiring properties that are supposedly for investment but are not the most appropriate to generate high returns. These properties also tend to have limitations for carrying out active management, that is, buying and selling at the most convenient time.
If it's for your use, buy what you like and in the location you like. And keep it as long as you like. If it's for investment, come and go when it's appropriate.
4. Cultural and social issues have a huge weight. It could be summed up with what many grandparents used to say: “Never sell the properties you buy. When you can save, keep buying but don’t sell.” Social issues also have great relevance. That’s why prejudices arise that make us make mistakes: “What will they say if I sell my house in Punta del Este and buy apartments in Flores?”
For a certain period of time, the best deal is probably to acquire a premium residential asset in an exceptional location such as Punta del Este, Puerto Madero, Miami Beach or Brickell. But also throughout the cycle there will be times to acquire properties in middle/low class areas, since these also have strong appreciations. Remember this: The real estate business is not location, location, location as those who promote and develop premium assets in these locations say. The business with real estate is timing, timing, timing and there are too many examples that demonstrate this.
5. A question of comfort and lack of knowledge: “Why should I sell it, what if I make a mistake?”
It is often uncomfortable to have to inform yourself, train yourself and seek opinions from different real estate, financial and tax advisors, among others, in order to have an objective view and be able to make a decision. But if you don't do it, no one will do it for you and the cost of not doing it is very high.
6. Believing that real estate investment is always local or always international.
Another great enemy is seeing real estate investment only as local or international.
As many people see it this way, they generally don't sell because why would they do it if it's not profitable to buy again in the same market. That's exactly where you have to focus your attention. It doesn't make sense to sell to buy again in the same market and type of asset without obtaining strong advantages. The key is to move from types of assets in the same market or go to different markets in order to continue building profitability. For that, you will surely have to look for real estate advisors in different markets since generally the scope of these is usually limited to neighborhoods and types of assets.
7. Getting stuck thinking about the exit cost: “If I sell, I will lose X% in commissions, writing costs, etc.”
When you sell, you have to assume the costs of deeds and commissions and this is often a limitation. But the issue is to think about how much you lose if you do not sell. These costs must be taken as part of the operation.
8. Believing that the property has a higher value or trying to get a price that is not worth it: “If they don't give me that much, I won't sell. I don't need to sell.”
There are times when we have unrealistic expectations of profits or sale values that have nothing to do with what the market approves. This makes us hold on to the asset and, many times, we lose the possibility of selling it at the best time and at the best price. Then, when the market adjusts, by not selling it, we have to wait several years to obtain the same or less, to which we must add the lost opportunity cost. There are dozens of examples of this type in Argentina, Uruguay, the United States and Europe.
It has been proven that the returns obtained by acquiring an asset and holding it in a portfolio for the long term are usually very low. This is because all markets go through different phases and by holding the asset permanently, the return is usually negative when the market falls. This penalizes the positive returns that the investment could have had, leaving it at a very low average that generally only exceeds inflation.
That is why, to obtain the best profitability, it is necessary to hold the property during the recovery and expansion phases of the markets, when the upward price curves are more pronounced. And this happens in a window of about 4 or 5 years. After that, you have to sell before the price begins to stabilize on a plateau.
The proceeds from the sale must be used to purchase another property that is currently in the recovery phase. This usually occurs in another type of asset or in another city and possibly in another country.
Therefore, only active management will allow you to obtain good results for your real estate investment. Otherwise, buy the property you want, without thinking about its price and enjoy it without guilt. You will have time to invest properly.
Source: apertura.com
