The main pattern found in almost everybody who invests in real property is that they acquire a property and never sell it. This is the enemy No.1 that prevents you from obtaining high returns sustained over time.
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As in any type of business, purchasing conveniently, i.e. under the market value, is a key factor, even more when dealing with real property investments as there are high operating costs involved. However, it is true that this is quite a difficult thing to achieve if you are not a sophisticated investor. But, during the selling process, an operation which is usually less complicated is where investors fall into the trap. That trap means investors´ failure to sell at the right moment. This mistake adversely affects your profitability, even more seriously than if you acquire the property under inconvenient terms.
There are various myths ingrained in investors which make it easier for them to fall into the trap. The following are the most common ones:
- Believing that the price of property is always going up and never going down.
It has been proved that if a strong appreciation of the property is achieved for more than 5 years, it would hardly be sustained for much longer.
The problem is that when a property reaches a very high price, even when it would be easy to sell it as there is generally a strong demand for it, most investors don´t sell it thinking that the price will continue increasing at the same rates. This is where they make a huge mistake.
Bear in mind the situation that took place in Argentina in 2001. Before that, property had reached really high prices. Because of the crisis, such values plummeted almost 50% on average and, later on, such values where recovered and even exceeded.
But, which would have been the situation if you had sold your property before 2001, e.g. in 1999 or 2000 and if you then had acquired some property in Spain or USA and then you had sold it in order to buy again in Argentina? The magic of real estate cycles would have allowed you to buy in our country again, twice or three times the number of assets you had in 1999. Big business that could have been achieved by implementing an active strategy, rather than the traditional passive strategy focused on maintaining the property without rotation.
- Failing to measure the achieved or potential return and failing to compare with other investment alternatives before deciding what to do.
Many people dedicate too much effort and work hours in their different professions and activities to collect enough money to buy a property. But in most cases, after conducting the purchase operation, they do not focus on maximizing the return of such capital. Instead, they think about generating more money, enough to buy another property and maintain the previously acquired one.
The impact suffered when you do not maximize your asset is very significant. By efficiently managing a real estate investment, it is possible to obtain 10 times the capital invested in 20 years. If a passive transaction is conducted, i.e. buying the property and keeping it, you can only get twice your invested money. Another interesting thing: by implementing a passive investment method, it would take you 150 years to obtain 10 times your initial capital while, as we mentioned before, with an active management process, this could be achieved in 20 years.
Real estate investors seem to be satisfied simply by protecting his invested capital by acquiring property and combating inflation. They do not conduct a follow up of the profits obtained yearly, as they do with financial investments.
When we ask investors about the net profits obtained from their real estate asset allocated to investment in the last year or in the last 5 years, they can hardly give an answer. On the one hand, one reason for this is culture and, on the other hand, they are not aware of the companies engaged in the management of this type of investments on a professional basis, as it happens with investments companies.
It is very important to know that every 15 to 20 years, period of time of a cycle, a new opportunity window is opened, which lasts for 5 years for each market and type of asset, and during such period a property experiences strong appreciation, in some cases exceeding 10% annually. Therefore, it is essential to be aware of which part of the cycle is taking place in order to define if you buy, keep or sell your property.
The key factor is to take advantage of strong appreciation phases at all times. In order to do this, it is necessary to move from one asset to another and from one market to another, thus turning a traditional cycle always ending up at the same point, into an endless ladder.
As in any other investment, the essential thing is to buy conveniently and sell at a high price, and real estate investment is not an exception to this.
- Failing to differentiate real estate for investment purposes and real estate for your own use. In the first case, your objective is to obtain money, in the second case, to enjoy.
It is important to separate the property for your own use from that acquired for investment purposes, because when you mix them, you are likely to make the mistake to purchase property intended for investment purposes but which is not the most suitable one to generate high returns. It may also put some constraints on the implementation of an active strategy, i.e. buying and selling at the most convenient time.
If the property is to be used by you, buy what you like and the location that you wish. Keep it as long as you want. Instead, if the property is intended for investment purposes, access and exit at the most convenient time.
- Cultural and social values have a significant impact. It could be summarized in the following expression said by seniors: “Never sell the property you buy. When possible, save money, keep on buying, but do not sell”. Social mandates are relevant as well and, based on such prejudices, we can make mistakes: “What would other people say if I sell my house in Punta del Este and buy apartments in Flores district?.
For a certain period of time, possibly the best business operation would be to acquire a Premium residential asset located in an exceptional place such as Punta del Este, Puerto Madero, Miami Beach or Brickell. But, also, all along the cycle, there will be moments when you should acquire property in middle-class or low-class areas, as they also experience high appreciation processes. Remember this: Real estate business is not location, location, location, as claimed by those promoting and developing Premium assets in such locations. The real property business is timing, timing and timing and there are too many examples that support this theory.
- A matter of comfort and lack of knowledge: “Why should I sell? What if I’m wrong?
It is generally awkward receiving information, training and seeking advice from different real estate, financial and tax agents, among others, to achieve an objective perspective and make a decision, but, if you fail to do so, nobody will make it for you and the cost of not doing it is very high.
- Believing that real estate investment is always local or always international.
Another huge enemy is seeing real estate investment only on a local or international basis.
As many people share this perspective, they generally don´t sell the property because it would not be a good deal to buy in the same market again. It is exactly on this point where investors must focus their attention. It has no sense to sell a property and buy the same type of asset in the same market without obtaining any major benefit. The key is to move from one type of asset to another in the same market or move to a different market in order to build return. To this end, you´ll surely need to look for real estate advisors in different markets, as their scope is usually limited to the neighborhoods and types of assets they manage.
- Taking no action based on exit-related costs: “If I sell, I´ll lose X% commission, deed expenses, etc.”
When you sell, deed expenses and commissions must be paid, this being in many cases a restriction. But the point is: how much are you losing if you don´t sell? These costs must be taken into account as part of the operation.
- Believing that the property has a higher value or demanding more than what the property is actually worth: “If they don´t pay XX, I don´t sell it. I don´t need to sell”.
Sometimes, we have unrealistic expectations regarding the profits or values that can be obtained from sales, which are not consistent with the market. This makes us keep our property and, many times, we lose the opportunity to exit at the most convenient time and with the best price. Afterwards, when the market is settled, if you did not sell, you have to wait for several years to obtain the same, or even less, as you must include the lost opportunity cost incurred. There are tens of examples in Argentina, Uruguay, USA or Europe.
It has been proved that the profit obtained from the acquisition of a property and the maintenance of such property for a long term is usually very low. This is due to the fact that all markets experience different phases and, when keeping an asset on a permanent basis, the profit is usually negative when the market declines. This is in detriment of the positive profits that could have been obtained from the investment, reaching a very low number, on average, which usually only exceeds inflation.
For this reason, in order to obtain higher profitability, it is necessary to keep the property during the market recovery and expansion phases, when the price rising curves are sharp. This takes place within a 4 or 5 year period of time. After that, you must sell your property before the price starts to stabilize.
With the income obtained from the sale, you must acquire another property that is experiencing a recovery stage. And this usually takes place in other type of assets or in another city and, possibly, in another country.
For that reason, only an active management process will allow you to obtain good results from your real estate investments. Otherwise, you buy any property that you want, regardless of the price involved, and enjoy it! You’ll have time to invest properly later on.