6 reasons not to invest in real estate!
In the eyes of many people, investing is equal to real estate. The average person can only imagine good things about investment properties. He invests his money in real estate, which he rents with a significant profit. I totally understand that you want to increase your money, but there are solutions to this that are more suitable for a beginner.
You need a home, so this article isn’t about buying a property right now, or rather renting it out. I had another article about when to buy your own apartment. I’m going to talk specifically here now about whether to invest your money in real estate. This is because it is a steeper terrain that, if you don’t understand, you can burn yourself very easily. You’ve heard from a lot of people that he’s just investing his money in real estate because that’s for sure. If you are an expert (possibly specifically big capitalist), then it is also an investment tool out of many, invest based on your own faith and expertise.
For the inexperienced, I recommend the same as for any other investment: get to know the world of real estate investing before you dive into the deep water.
Let’s see what are the 6 reasons not to invest in real estate.
1. Lack of liquidity
Liquidity means being able to monetize an asset at any time when needed. Real estate is one of the least liquid investments of all investment opportunities. While there are up-and-coming places and there are times when even a hutch can be sold at a gold price, these are intermittent. It’s not uncommon for a seller to have to wait months to find someone to give a reasonable price for a property. Until then, not only will you have money in the property, but you can expect additional expenses due to maintenance costs.
2. High entry costs
If you want to invest money in real estate, you need to have higher contribution compared to any other direction. Even if we only take the contribution of credit, millions of capital are needed to get you started at a basic level. However, there are also lower entry limits than real estate investing.
3. Low yields
You may know people who have made a nice profit on a property by renting it out. They continued to win on it if they were subsequently sold at a high profit. They are the ones who either know something very well or were in the right place at the right time. But they prefer exceptions or experts, by no means the average beginner.
The first two disadvantages can still be even out by a high yield. In real estate, the average return on investment in Hungary and globally is around 2-5%. By comparison, the multi-year average of the stock market is 8-10%.
Looking ahead, here are the 5-year results of equity funds:
Based on 2-5%, this is no longer really attractive compared to the fact that you have a lot of money in it (this much money can bring you significantly more elsewhere). If you borrowed money to buy the property, this yield may be just enough to pay off the loan. However, by adding the value of your own invested work, not only is the return on real estate investment unattractive, but most of the time the return is negative.
If you have taken out a loan, then what you have to look at in this case is by no means the total profit. After all, you can see if you’re extracting credit or not. The topic that is important to you here is how much profit you will make on your own invested money with that loan. After all, if you get more for it elsewhere, why bother?
4. High risk
Before you speak: other investments carry risks too. However, when investing in real estate, it is especially important to buy the right property in the right place. To do this, you need to know the area in its current state, as well as development plans for the area.
This is because your return depends almost entirely on what and where you chose. The relationship between choice and return is, say, there for stocks, but there you don’t get 1 share for many millions as you would for real estate investing. This makes it much easier to split your money.
5. It is difficult to diversify
Diversification is one of the tools of risk management, the point is that you invest the capital at your disposal in several directions. In most cases, it is pretty difficult to buy a single investment property, so diversification does not take place. Then you run the risk of either making the right choice or not. If you have multiple properties in different locations, you will also need to manage them geographically, which can place an additional burden on you.
6. Real estate investing is inconvenient
You can now make the most of your investments conveniently, with a few clicks, and then track them online in the same way. This is not true for real estate investing. Before you buy, you obviously need to look at more and then check their condition later.
Tenants are also mean responsibility to you, especially when it comes to tenants with children. So if you rent out the property, you have to reckon as the main tenant and maintainer that if something goes wrong (e.g. boiler), you have to go out to the site to arrange the repair. By Murphy’s law, it will always go wrong when the date is least suitable for you.
If you definitely want to profit from real estate investing, be aware of the risks before spending money. Creating a well-diversified real estate portfolio requires a lot of money and a lot of expertise, which if you don’t have it in one person, it may not the most obvious that you want real estate investment. Instead of your own real estate, you can use a real estate fund that invests in the same direction, only requiring much less starting capital and commitment from you.
- How do you feel about real estate investing?
- Do you own your own investment property?
- What other direction would you consider appropriate instead of / in addition to real estate investing?
If you have any questions on this topic, feel free to contact us.