THE WORST ENEMIES OF REAL ESTATE INVESTMENT.

It is commonly said that investing in real estate is investing in a heritage that provides greater certainty to your loved ones. However, if said investment remains static, it will not generate the expected economic benefits to ensure the future of your family.

Almost everyone who invests in real estate buys a property and chooses not to sell it for a long time. There are even those who never put it on the market. And it is precisely this thought that prevents a real estate investment from achieving high sustained returns over the years.

Real estate investing is a business. Therefore, the key to buying well lies in the acquisition of properties below market value. However, it is difficult to achieve this without being a sophisticated investor due to the high transaction costs associated with real estate investment .

However, during the sale – a process that often seems easier – many investors often fall into the trap of not selling at the right time. This mistake has a profound impact on investment performance, far greater than buying above market value.

But this is not the only mistake investors make when they want to increase their returns. There are numerous myths ingrained among investors to avoid the sale of their real estate. We present the most common, those that have become the worst enemies of any real estate investment:

Do not measure the performance achieved or the potential of the investment.

Most people put in a lot of effort and put in many hours at their jobs to raise enough money to purchase a property. Once they do, instead of focusing on maximizing the return on capital already invested, they decide to save to buy another asset and keep the old one.

The impact of not maximizing that capital is very significant. The efficient management of a real estate investment can multiply its value 10 times in a period of twenty years. On the contrary, passive management – ​​buying without selling – only manages to double it.

Still not convinced to sell? Here’s another interesting fact: it takes about 150 years for a passive investment to multiply its initial value by 10.

Unlike financial investors, it seems that the real estate investor is content to seek a refuge for his capital invested in real estate, covering himself from inflation, and not tracking the performance obtained year after year.

When asked what the net return on equity allocated to real estate investment was during the last year, an investor can hardly answer. This is because there is no culture to calculate it and know it to compare it with other investment alternatives. Ignoring these indicators causes an investment to remain static and generate minimal returns.

The real estate market is characterized by cycles that last between 15 and 20 years. In each of them, a window of approximately five years is opened for each market and type of asset in which a property can appreciate with a value above 10% per year. However, it is important to have advice to know what phase of the cycle the market is in to define whether to buy, keep or sell the property.

Therefore, phases of strong appreciation should always be taken advantage of with a shift between assets and markets. In this way, a traditional cycle – which always ends at the same point – can become an endless staircase.

Remember that the key to any investment is to buy low and sell high. Real estate investment is no exception to this rule.

Believing that real estate always goes up and never goes down

It has been shown that it is difficult for a property to appreciate strongly for more than five years.

Brickell, a well-known financial district in Miami, is a clear example. Although the real estate in the area reached a high price and its sale was facilitated by the high demand, many owners chose not to sell their real estate thinking that the value would continue to grow at the same rates. Today, one cannot speak of the same development in the area.

Considering that the price of a property, especially those located in fashionable areas, will continue to rise is a risk since everything earned on the investment can be lost by not selling at the right time.

The weight of social and cultural issues.

“Never sell the real estate you buy. When you can save, keep shopping. But without selling!” Does this phrase sound familiar to you? Many have heard it from their grandparents and it is an idea that has been passed down from generation to generation among Latinos.

This traditional thought, as well as the importance that is socially given to the opinion of others, become serious prejudices that lead you to make mistakes as a real estate investor.

It is common to question what others will say if you decide to sell a luxury apartment in Miami to buy low-value houses in Detroit. It doesn’t seem logical. However, if you consider the real estate cycle that we talked about earlier, there are periods in which possibly the best deal is to acquire premium residential assets in exceptional locations such as Brickell (Miami), Punta del Este (Uruguay), Puerto Madero (Buenos Aires) and Polanco (CDMX). But in others, the best option is to buy properties in lower-middle class areas since they can get strong appreciations.

The real estate business goes beyond the location, location, location that developers of premium assets promote so much in this type of location. Actually, it is a question of timing, timing, timing following the phases of the real estate cycle.

Not distinguishing between real estate investments and real estate for own use.

As you might guess, a real estate investment is made to generate money through it, while a property for own use is bought to live in or enjoy it.

It is important to separate the properties for own use from those for investment. If they are mixed, the chances of acquiring a property under the investment assumption increase when it is not the most appropriate for the generation of high returns. This makes active management difficult , that is, buying and selling at the most convenient time.

If you buy a property for your use, don’t limit yourself: buy what you like best, in the location you want and keep it as long as you want. If you make an investment, enter and exit when appropriate: don’t get ahead of the market cycle or wait any longer than necessary.

Believing that real estate investment is always local or international

Another great enemy is thinking that real estate investment can only be local or international.

Unfortunately, many people see it this way and avoid selling their properties. They do not find a reason to sell because they believe that it is not a business to buy in the same market. And they are right: it makes no sense to sell the same type of asset in the same market because it is difficult to obtain great advantages.

The key, then, lies in displacement. To increase the profitability of your real estate investments , you must buy different assets in the same market or go to a different one to continue building profitability. For that, it is recommended that you look for real estate consultants in the markets that are attractive to you since they know about neighborhoods and types of properties.

Comfort and lack of knowledge: “Why do I sell? What if I’m wrong?”

Researching real estate investments in depth to make an objective decision can be uncomfortable. It is important that an investor be informed, trained, as well as seek the opinion of different real estate, financial and tax advisors in order to create a realistic context for the potential of their alternatives. Don’t forget that if you don’t do it, no one else will do it for you and the cost of ignorance is very high.

Immobilization for the exit cost: “ If I sell, I will lose…”

In the sale of a property, the selling party must bear the costs of the deeds, commissions and other expenses. These exit costs are often seen as constraints among owners because instead of thinking about how much they can gain from the sale at the right time, they focus on the loss. To avoid this, we recommend integrating the additional costs in the operation.

However, you must be careful with your calculations. Believing that your property has a higher value than it really has can lead you to think that it is not necessary to put it on the market. Those unrealistic expectations will only cause you to miss out on getting out of the investment at the best time for the best price.

Remember that real estate markets adjust in long cycles. Therefore, by not selling, you must wait several years to obtain a value similar to the current one. To this waiting period, the cost of the lost opportunity must be added.

There are dozens of examples of this phenomenon in other countries and even in Mexican cities such as Mexico City, Toluca, Querétaro, Puebla, Guanajuato, Guadalajara, Zapopan, Zacatecas, Durango, Gómez Palacio, Torreón, Saltillo, Monterrey, Chihuahua, Tampico, Tijuana. , Mexicali, Hermosillo, Obregón, Los Mochis, Culiacán, Mazatlán and Tepic. Many investors have obtained low returns by holding an asset in their portfolio for the long term. The markets go through different phases and the permanence of an asset punishes the positive returns on investment when its market falls, so a very low average is obtained, only surpassed by inflation.

To obtain greater profitability, the property must be maintained during the recovery and expansion phases of the markets, since at those times the upward price curves are more pronounced. This stage lasts approximately four or five years. After that wait, it must be sold before the price stabilizes at a plateau.

With the profit from said sale, acquire another property that is in a recovery phase at that time. Normally, it can happen in other types of assets, in other cities and in other countries. In this way, an active management of real estate is given way that allows high returns on real estate investment to be obtained.

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