7 definite ways to lose money in real estate-
Updated: May 12, 2020
Many investors had made millions investing in real estate. Most of them swear by the power of this wonderful compounding tool that multiplied their wealth over a period of time. Some investors however say that they have suffered losses in real estate. In this blog, we will talk about 7 key mistakes that result in real estate investors incurring losses on their investment. These must be avoided by a smart real estate investor at all cost:
1. Not taking services of real estate consultant- Real estate consultants charge a nominal fee from their clients for their services. Some investors prefer not to take the help of real estate consultants as a result, they do not get the right professional advice before investing, because of which they end up investing in sub-par property and in the wrong area. On the other side, a seasoned real estate investor knows the value of professional advice and always prefers to take the services of a consultant before investing. Real estate consultant provides immense value to investors as they offer following services-
Real estate consultants understand the need of their clients. They do thorough research in terms of the potential of the area, prevailing prices, and other available options for investment thus help their client in picking the best property.
By virtue of their knowledge and presence in the market, they are in a better position to negotiate price and lease terms of the property.
Help their client in securing loans at the best possible interest rates.
They assist their client in completing all legal formalities, including paperwork of the property transaction.
A good real estate consultant provides end to end solutions and investors should not consider their fee as an expense but they should treat it as an Investment which will help them in multiplying their wealth.
2. Trading- Real estate by its very nature is a long term investment. However, few investors buy property for the short term and only for trading. They end up paying stamp duty on property, borrow money, take short term loans from private lenders at high interest, and as a result they are always in a hurry to dispose of their property. If they do not find the right buyer, they get impatient and may have to sell their property in distress, thereby incurring a loss on their investment.
3. Chasing financial return- Some investor chase financial return they make an investment in the property, that is giving a false promise of temporary high returns, as a result, they end up getting in a value trap. They buy property at a very high price in the area which does not command any potential and then end up selling their property at a loss. Instead of chasing financial return, an investor should do a thorough research of the area and should focus on buying a good quality property at a fair price.
4. Over leveraging- Throughout my career, I have observed that most Investors get a little stretched out of their budget while purchasing a property, which is quite normal. But some investors get over-leveraged and take up a significantly bigger loan than they are capable of effectively paying back, often misjudging their own cash flow situation. Similarly, some investors just pay booking amount & end up committing for more units than they can afford. It is often done with an aim to keep a single unit for self-usage and other purchased units as an investment for revenue generation in the near future. If buyers misjudge their cash flow situation or market conditions, they might not get buyers immediately and may end up selling these additional property units at a loss. This usually happens in the case of an under-construction property.
5. Herd mentality- Many investors do not clearly assess the purpose of their investments. They buy property because their neighbor, friends & relatives have purchased a similar property and have recommended it to them. When the property fails to meet their expectation or temperament, they end up disposing the property in a hurry and suffer loss.
6. Inability to diversify- Some investors put their life-long savings in one property. It is very important not to put all your eggs in one basket. Smart real estate investors should focus on building a well-diversified portfolio of property that is spread across the region.
7. Buying at high and selling at low- Most of the investors go with the tide, they feel buoyant when the prices are shooting up and end up buying a property more than its intrinsic value. One the other hand some investors wait for a correction in the market but when it actually happens, they fail to invest in the hope that prices may fall further. But Smart investors make the right decision at the right time, they take advantage of the buyers market & have the confidence to secure the quality property at a reasonable price.
As we conclude, I would like to ask a question that should help real estate investors in their buying decision-
Do you think the current of CoVid 19 crisis will prevail forever?
Option A. Yes(In that case economy will be wiped away)
Option B. No (Then this correction offers a great opportunity for investment in real estate and this window may not be available beyond 5-6 months)
PS- Your views please?.