Top 10 common mistakes made by real estate investors

By Mariano Capellino, CEO at INMSA

As I always say in my conferences, acquiring real property has been one of the most frequent mechanisms used by Argentine people to invest their money. But in general, they are not investing, they are getting a property. Election is based on figures recorded in previous years or on the assumption that they can preserve their invested capital. And, in many cases, these are beliefs rather than real facts.

Below you will find the 10 most common mistakes made by investors when acquiring real estate assets:

  1. The belief that a successful acquisition experience where the asset was revalued will continue forever.

This is not the case. After several years of strong appreciation in a certain market and type of asset, revaluations start to reduce and even disappear. In order to sustain convenient returns, it is necessary to move from one market to another one which is experiencing the right cycle or, to move from one asset to another in the same market. It’s not magic. This business is controlled by the cycles of the market.


  1. The belief that you can never lose capital when you invest in real estate.
    In many occasions it has been proved that assets can experience strong declines in their values and, if you decide to disinvest, you must be ready to accept strong losses or wait for a long time until the value can be recovered. For instance, in Miami, real property by the beach or in Brickell suffered a 50% drop in 2009 compared to the value obtained in 2007. During the last two years, brand-new units have been sold at a price 30% to 40% lower than the amount paid in pre-construction projects, something risible for a professional investor. Just by doing this, you are losing money.


  1. The belief that buying on an off-plan basis is always good business

Actually, everything depends on the phase of the cycle being undergone by the market. In Argentina, this business is tied to the value of the dollar currency and inflation. They estimate that paying up to US$500 per square meter of construction is the ceiling to avoid risks. Above that price, it is possible that a correction in the exchange rate during the construction of the project –in general up to 24 months- may force to sell the asset under the investment made during the pre-construction process. Before the recent devaluation of the peso currency, the construction cost in Argentina was U$S 1,500 higher than in USA or Europe, i.e. it was not business at all. We’ll see what happens with the devaluation process.


  1. The belief that acquiring premium assets and with the best location are the most attractive and the safest ones.

The equation would actually consist of acquiring the asset based on timing (as defined in large investors worldwide) rather than location. The convenience of acquiring property in that way is not an absolute truth, as it will depend on the time when the operation is conducted. Each type of asset – categories A, B or C, from higher to lower values according to their location and type of construction – has their opportunity time.

In general, premium assets in the best locations are the first ones to be revalued after a crisis because they are targeted by foreigners and high-income people. But when they get to their historic price, they remain stable, they are no longer good business, and class B or C opportunities emerge – of lower values in peripheral areas which usually generate more rental income- For this reason, it is necessary to know the right moment to buy or sell.


  1. The belief that it is necessary to build to make money.

It has been proved that there is a high learning cost; and strong economies of scales are required to carry out construction work. In order to generate high returns which can be sustained over time, the investor should move the construction process from one type of asset to another and from one market to another, taking advantage of the cycles. One tip for investors: leave construction to those engaged in that activity.


  1. Buy a property, fall in love with it and never sell it.

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 negatively impacted when the market declines and then, its recovery is not reflected when the market rises rapidly. The best return is obtained if you maintain the asset when the price ascendant curves are steep and then sell it when the price starts to stabilize. With the income obtained you must acquire another asset which, at that moment, is undergoing value acceleration.


  1. The belief that return is based only on rental income

In order to understand the true annual income generated from a real estate asset it is important to take into account all income and expenses involved in the real estate operation. When calculating this, do not forget to take into account the commissions to be paid in every step of the process, real estate agents, notaries public, taxes, remodeling, if any, and maintenance charges. In general, people consider the sale price plus rental amounts and they leave out expenses which significantly reduce profitability.


8) The belief that acquiring through crowdfunding is good business because you get emblematic buildings.

Be very careful with crowdfunding fine print. If the operation is strongly leveraged by bank financing, financial institutions will first receive the payment of the loans and, then, the participants will obtain their returns. If the value of the property goes down and the projected profitability is not reached, participants may risk losing that return and also part of their capital.


9.The belief that it is always good business to purchase property from banks, auctions or developers.

It may be a successful operation, but it is necessary to have more knowledge and experience than for a traditional acquisition. Many investors believe that just because they are using this method they are buying at prices quite below the market value, but most of the time they are acquiring at higher values and there are public statistics to prove this.


  1. The belief that investing in property is different from a financial investment

Investing in real estate has many similarities to financial investments. But those who invest in property do not see it that way. If you invest in stock or securities in the country or abroad, you know for sure the exact amount you will get by the end of the year. In the case of real estate, it is not usually that precise and it is not good. And there is a reason for this. In the financial market there are experts, good and not so good, but they are there.

In the real estate business, the investor interacts with someone who is the one who sells the asset, whose main interest is to obtain the highest benefit for his/her company. Around the world there are companies working for real estate investors, dealing with investors and defending their interests. If there is no precision in the real estate investments, the expected profitability may not be the real one. It is necessary to be detail-oriented, work with metrics and strict controls. In this way, it will be possible to obtain returns consistent with the investment.

When we do something which turns out to be successful we tend to repeat it. It stands to reason. But this is not the case when investing in property. All depends on specific conditions of the market and sector. For that reason, for each operation, it is necessary to carry out some deep analysis if you intend to get a consistent profitability. Do not make these mistakes, don´t be misled by false beliefs which will only affect your investment.


Share Your Thoughts

Your email address will not be published. Required fields are marked *