The number one enemy in real estate investing

What unites almost everyone who invests in real estate is that they buy a property and don’t sell it for long, if ever. This pattern is the number one enemy to obtain sustained high yields over time .

As in any business, when you buy well, that is, below market value, it becomes the key; and more in real estate investment that has high transaction costs, although it is true that it is very difficult to achieve it without being a sophisticated investor. But in the sale, a process that usually seems easier, is where investors often fall into the big trap, whose name is not selling at the right time. This error has a very negative impact on performance, even much greater than that of buying wrong.

There are several myths that have been taking root in investors that make it easier to fall into not selling. These are the most common:

  1. Not measuring the performance achieved, its potential, or comparing it with other investment alternatives to decide what to do

The effort and hours of work that many people do in their different professions and activities to raise enough money to buy real estate is very great. But in most cases, after achieving it, the focus is not on maximizing the return on that capital . Instead, they think of generating enough money again to buy another good and keep the old one.

The impact of not taking care of maximizing it is very significant. By efficiently managing a real estate investment, the invested capital can be multiplied by 10 in 20 years . If passive management is done, that is, I buy and keep without selling, it is only possible to double it. Another interesting fact: with a passive investment it would take more than 150 years to multiply your initial investment by 10, while as we said, with active management it takes two decades.

The real estate investor seems only content to seek a refuge for his capital invested in real estate and hedge against inflation . Without monitoring the performance obtained year after year, as it does with financial investments.

When we ask an investor what was the net return of the portion of his assets destined for real estate investment in the last year or the last five years , he can hardly answer. One of the reasons is that there is no culture to do it.

It is very important to know that every 15 to 20 years, which lasts a cycle, a window of opportunity opens that usually lasts five years for each market and type of asset in which a property appreciates a lot, in some cases more than 10%. annual . Therefore, it is very important to be clear about what phase of the cycle one is in to decide whether to buy, hold or sell.

The key is to always take advantage of strong appreciation phases, but for that it is necessary to move from assets and markets. This allows turning a traditional cycle that always ends at the same point, into an endless staircase. As in any investment, the important thing is to buy low and sell high, and real estate investment does not escape this premise.

  1. Believing that real estate always goes up and never goes down

It is shown that if a strong appreciation of a property is achieved for more than five years, it will hardly be maintained.

The problem is that when the property is at a very high price, and although it is easy to sell it since there is generally a lot of demand, most do not sell thinking that the value will continue to grow at the same rates, that is where the big mistake is made ; what has happened in Brickell is a clear example.

At times, one can make an exceptional trade, but when one considers that the price will continue to rise, a strong correction begins and everything gained can be lost.

  1. Cultural and social issues carry enormous weight

This happens especially with Latinos and could be synthesized with what many grandparents used to say: “Never sell the real estate you buy. When you can save, keep buying but without selling”.

Social issues are highly relevant, from which arise the prejudices that make us make mistakes: “what will they say if I sell my apartment in Miami and low-value houses in Detroit?”

For a certain period of time, possibly the best deal is to acquire a premium residential asset in an exceptional location such as Brickell, Punta del Este in Uruguay, Puerto Madero in Buenos Aires or Polanco in CDMX. However, throughout the cycle there will be times to acquire real estate in lower/middle class areas, as these too have strong appreciations.

Remember this: The real estate business is not “location, location, location” as those who promote and develop premium assets in these locations say . The business with real estate is “timing, timing, timing” and there are too many examples that prove it.

  1. Not distinguishing between real estate investments and real estate for own use. In the first one you do it to earn money, in the second to enjoy

It is important to separate what are properties for own use from those for investment, since by mixing them it is very possible that you will make the mistake of acquiring properties that are supposedly for investment , but are not the most appropriate to generate high returns. These also usually have limitations to execute an active management, that is to say to buy and sell at the most convenient moment.

If it’s for your use, buy what you like, in the location you want, and keep it for as long as you want. If it’s for investment, get in and out when appropriate.

  1. Believing that real estate investment is always local or always international

Another great enemy is seeing real estate investment only as local or international.

As many people consider it that way, they generally do not sell, because why would they do it if it is not a business to buy again in the same market ? That’s exactly where you have to set your sights. There is no point in selling to buy back in the same market and asset type without strong upside.

The key is to move between asset classes in the same market or go to different markets in order to continue building returns. For that, you will surely have to look for real estate advisors in different markets, since their scope is usually limited to neighborhoods and types of assets.

  1. A matter of comfort and lack of knowledge: “What am I going to sell it for, what if I’m wrong?”

Generally it is uncomfortable to have to inform yourself, train and seek opinions from different real estate, financial and tax advisors , among others, in order to have an objective vision and be able to make a decision. But if you don’t, no one else will, and the cost of not doing it is very high.

  1. Immobilize thinking about the exit cost: “If I sell, I will lose a percentage in commissions, writing cost, etc.”

When it is sold, you have to assume costs of deeds and commissions, this is often a limitation; but the issue is to think about how much you stop earning if you don’t sell. These costs must be taken as part of the operation.

  1. Believing that the property has a higher value or trying to obtain a price that is not worth it: “If they don’t give me that much, I won’t sell. I don’t need to sell”

There are times when we have unrealistic profit expectations or sales values ​​that have nothing to do with what the market validates. This makes us keep the asset and, many times, we lose the possibility of leaving, at the best time at the best price .

Then, when the market adjusts, by not selling it we have to wait several years to get the same or less, to which we must add the lost opportunity cost. There are dozens of examples of this type, both in the US, Brazil, Panama, Costa Rica, Spain and Argentina.

It has been shown that the returns obtained by acquiring an asset and keeping it in a long-term portfolio are usually very low . This is because all markets go through different phases and by holding the asset permanently, the return is usually negative when the market falls. This punishes the positive returns that the investment could have had, leaving it at a very low average that generally only exceeds inflation.

That is why, to obtain the best profitability, it is necessary to have the property during the recovery and expansion phases of the markets, when the upward price curves are more pronounced. This happens in a window of around four or five years. After that, you have to sell before the price starts to stabilize on a plateau.

With the proceeds from the sale, another property must be acquired that, at that time, is in the recovery phase, usually in another type of asset or in another city and possibly in another country . Therefore, only active management will allow you to obtain good results for your real estate investment. Otherwise, buy the property you want, without thinking about its price and enjoy it without guilt, you will have time to invest.

By Mariano Capellino, CEO of INMSA

This is an article from edition 121

*Editor’s note: The opinions expressed here are the responsibility of the author and do not necessarily reflect the position of Inmobiliare.