Investing in real estate seems easy, but there are many challenges you will face. The idea is to buy and maintain the asset over an extended period of time because the property will revalue. Investing in real estate requires analyzing different market types and classes to determine if the portfolio should be maintained, bought, or sold. You will need to measure how much the long-term property will yield as well as inflation. It is essential to understand the mistakes that can be made while investing.
Believe that pre-construction – buying well – is necessarily a good business
Pre-construction depends on the market and the phase of the cycle it will go through. An example of this is the current market in Miami. Given the lack of knowledge of the foreign investor and the strong incentive in commissions from the developers to the brokers, pre-construction assets are sold – up to 40% above the same finished asset brand new.
Believe that the same recent history can be repeated
Sometimes investors will enter the market at an opportune moment and leave halfway through the cycle with an attractive profit. This is not common. After several years of strong appreciation in a certain market, the evaluations begin to reduce. To sustain these returns, it is required to move from the type of asset or market if there are no opportunities.
To think that buying real estate from a bank, at auctions, or from developers always means doing a good business
Acquiring assets through these means will require expertise even greater than that required in a traditional purchase. Many investors feel that they are buying below market value but often end up buying above.
Believe that Premium properties are the most attractive and safe
Premium assets are the fastest way to recover in a crisis, but the risk may be higher. The asset’s value may have devalued over time. Therefore, it depends on the moment of the cycle. Just ask who bought in Brickell in 2014. For four years, your property lost value, and rental income was minimal in that period, compared to the business of buying assets class B with a strong revaluation in that period and a high income.
Lack of measurement and belief that the performance is based only on rental income
The performance is built with three variables. The first is the discount on the purchase, which requires a scale and is only accessible to professional and sophisticated investors. The second is the appreciation, where, from active management, it is possible to overcome inflation and appreciate at rates of more than 10% per annum, only in short periods of the recovery and expansion phase of each type/class of assets in a market. This requires thinking and operating globally. And the third is income, which is the only variable that an “investor” generally has access to.
To evaluate the annual performance of the real estate asset, it is important to bear in mind the total cost (purchase value plus expenses associated with the purchase, remodeling, etc.), plus all the income and expenses generated during the exploitation period (after the purchase) ) and this is subtracted from the sale or appraisal value, minus sales expenses. In this way, we can have a precise performance. In general, the analysis is simplified and what seems to be a great result is just a performance higher than inflation.
Buy a property and never sell it
The returns obtained by acquiring an asset and keeping it in the long-term portfolio are usually very low, given that all markets go through different cycles, and by keeping the asset permanently, profitability is punished when the market falls. In their recovery and expansion phase, the markets have a window of approximately 4 to 6 years, and you should always take advantage of this period and then leave. The best performance by appreciation is obtained by taking advantage of the steeper curves of the assets and when they begin to sell them to take advantage of another market in better conditions.
Believe that capital investment never loses capital
It is proven that, at times, assets can generate sharp drops in values. If you choose to divest, you must be willing to assume strong losses or wait a long time to recover the value. This has a strong impact on average long-term yields, which, in general, in passive portfolios, historical appreciation levels barely reach inflation. It is demonstrated that investing actively in real estate allows achieving high returns. To achieve high returns, the key is to enter the market indicated at the right time with an active and professional strategy.
To help you grow as an investor, make sure you learn from these mistakes!
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