Out of all the various types of investment opportunities available today, buyers seem to have a tendency of being emotionally attached to real estate investing. This is perhaps why such people always rationalise their emotional decisions by believing in some of the myths of real estate investments.
It is necessary for anyone who wants to make good real estate investments to be aware of those myths that surround it. This is especially true if one does not want to get tangled in the emotional aspects of such investments that can prevent you from making decisions that are financially sound. The essence of knowing what such myths are is to be able to recognize them and dismiss them anywhere they are encountered. The aim of this article is to identify some of such myths of real estate investments and expose them.
Myth: Buying is Better Than Renting
All over the world, it is common knowledge that buyers of real estate properties have an emotional connection with the real estate that they purchase. From ancient times, it has always been considered the “adult” thing to do for a person when they buy real estate. As you can imagine, there is no financial backing for such decisions. It is merely rooted in the thinking that when a property is tied to your name then somehow you tend to have some more economical security than someone who does not have one.
However, there is clearly no truth in this myth, especially when you consider the financial aspects. There are some situations when the better thing to do is clearly to buy whereas there are other cases when the best option would be to rent. The best thing to do would depend on looking at each case and the circumstances surrounding it. In a subsequent article, this rent vs. buy decision is going to be discussed further.
Myth: Real Estate Investments Can Be Flipped Easily
This is not one of the most popular myths of real estate investments. However, stories of self made millionaires who made their fortunes as a result of only buying and selling real estate on the basis of monies they borrowed were very rampant before the subprime crisis broke out in the US.
These bloggers were responsible for propagating the virtues of flipping, which is buying and selling real estate a lot of times over and in a very short amount of time. What the idea entailed was to book the profits that arose from the differences in price and then convert it into physical cash. However, what these so-called real estate gurus omitted (deliberately or ignorantly) was the huge quantity of transaction costs that are involved with any type of transaction involving real estate anywhere in the world. In other words, one is bound to incur more transaction costs when you flip more properties. These transaction costs can amount to as low as 2% or as high as 5% of the cost of any real estate property involved.
Aside from the transaction costs, finding a buyer who is willing to purchase the property and then going into negotiations on a deal can be a time-consuming and tedious process. Therefore, it is well known that flipping properties can result in a huge waste of time as well as resources, which is why most financial advisors say they should be avoided as much as possible.
Myth: Past Performance Predicts Future Performance
Hopeful real estate investors have a common tendency of day-dreaming and in the process they love to extrapolate the trends that were available in the real estate market in the past and visualise a future scenario that is extremely bullish. However, they fail to realise and appreciate the fact that in the last decade or so the world has gone through a fundamental shift. An unprecedented boom in the emerging economies has been created by such business fundamentals like free trade, outsourcing, and cross border investments by multinationals. Apparently, the future does not predict any huge revolutions. And in any case, it is highly unlikely that the performance of a few years gets repeated in the future years, because it is very unlikely that any unexpected economic revolution is going to fundamentally change the present economic paradigm. Any real estate investor that is hoping on a repeat performance is going to be severely shocked!
Myth: Land Prices Always Go Up in Value
This logic is very common in developing economies where an unprecedented boom in the real estate sector has been happening in the past ten years or so. In fact, over the past twenty or so years, the price of land in these economies has increased by up to ten times what it used to be. This is why those living in these countries tend to believe that land prices always increase, that is there is always an increase in the value of real estate.
Nothing can be further from the truth. There are actually situations in which real estate prices do come down. Take for instance, developed economies like the US and Japan where crashes in real estate prices by as much as 40% have happened. In fact, for the better part of the last decade, the prices of real estate properties have gone down in Japan and have continued to remain there.
This is why it is merely a mythical statement to believe that ‘land prices always appreciate in value.’ Several factors determine what the price of land in any country would be, and one of those factors is the well-being of the economy.
Myth: Land is Scarce
Perhaps this is the most popular myth that real estate salesmen and other participants of real estate investments propagate. They keep on saying that land is scarce. In the world today there is only a limited amount of land. And in addition to the fact that the world’s population is growing daily, one is bound to conclude that the prices of the world’s land is going to continue to increase into perpetuity because there is always going to be land shortages. The most common myth propagated by real estate salesmen and other proponents of real estate investing is that land is scarce. There is only a limited amount of land in the world.
This is clearly not the case. All you need to do is take a closer look at the numbers.
First of all, there is a limited amount of land in the world today. This is actually true. However, development in technology has made it possible to make more efficient uses of this limited land. Several scientific studies have been done in this field and they all conclude that there would still be an abundant amount of land for all human beings to survive and thrive even if their populations grew by as high as four folds!
Secondly, other scientific studies have been done which concluded that the world’s population is about to be balanced. What this means is that the era of population growth has reached its zenith and now the number of people will remain the same.
This is why, it is nothing but the propagation of a myth to say that ‘land is scarce and therefore precious.’