Real Estate: Why The Hesitation?

There are many reasons why people don't invest in real estate. Firstly, it requires a large sum of money upfront, often tens or hundreds of thousands of dollars, which many people simply don't have access to. Additionally, investing in property requires commitment, and people may be hesitant to take on such a large financial responsibility, especially if their life circumstances are prone to change. Another common barrier is the challenge of obtaining a loan, as lenders often have strict requirements and may not approve loans for those with higher debt-to-income ratios. Furthermore, people may be fearful of investing in real estate due to the risk of property values decreasing or the potential for problematic tenants. Other concerns include the time and effort required to manage properties, the potential for unexpected repairs and maintenance costs, and the impact of economic downturns on the housing market.

Lack of education about the benefits of real estate investing

Real estate investing offers a plethora of advantages that many people are unaware of, and this lack of knowledge may contribute to their hesitation to enter the market. Understanding these benefits is essential for making informed decisions about whether to include real estate in one's investment portfolio.

Firstly, real estate investing provides the opportunity for passive income through rental properties. Residential or commercial properties can be purchased to rent out, creating a consistent cash flow to cover expenses or reinvest in more properties. This passive income can be further enhanced by hiring a property management company to handle the properties, making the income completely hands-off for the investor.

Another benefit of real estate investing is its ability to serve as a hedge against inflation. As inflation rates increase, so do real estate prices, allowing investors to maintain the purchasing power of their capital. Additionally, rents on investment properties can be increased to keep up with inflation, further protecting the investor's returns.

Diversification is another key advantage of real estate investing. By investing in real estate, individuals can lower the risk of a total loss compared to investing all their capital in stocks or other volatile markets. Real estate has a low correlation with other asset classes, so adding it to a portfolio can reduce volatility and provide higher returns per unit of risk. This diversification can be further enhanced by investing in different real estate markets or various types of real estate investments, such as rental properties, fix and flips, and real estate investment trusts (REITs).

Real estate also offers tax advantages that are not widely known. Investors can take advantage of numerous tax breaks and deductions, such as deducting the cost of owning, operating, and managing a property, as well as depreciation. These deductions can result in significant savings at tax time and lower the overall tax liability for investors.

Lastly, real estate investing provides the potential for long-term capital appreciation. Property values often increase over time, leading to significant gains when it's time to sell. This appreciation, combined with strategic financing, can help build capital and increase an investor's real estate portfolio over time.

In conclusion, a lack of education about the benefits of real estate investing may deter some people from exploring this option. However, by understanding the potential for passive income, inflation hedging, diversification, tax advantages, and capital appreciation, individuals can make more informed decisions about including real estate in their investment strategies.

Fear of losing money

Investing in real estate is a common way to build wealth, but it can also be intimidating. One of the biggest fears people have about investing in real estate is the fear of losing money. This fear is understandable, as investing in any asset carries some risk. However, it is important to recognize that this fear can hold you back from achieving your financial goals. Here are some ways to address and overcome the fear of losing money in real estate investing:

• Understand the Risks: Instead of letting fear control your decisions, educate yourself about the risks involved in real estate investing. By understanding the potential pitfalls, you can take informed actions to mitigate those risks.
• Don't Try to Time the Market: It is impossible to predict the real estate market accurately. Avoid buying properties with the sole intention of selling them later at a higher price. Instead, focus on generating positive cash flow each month by ensuring that your rental income exceeds the property's ownership costs. This way, you are protected from market fluctuations and only sell when it is financially advantageous.
• Maintain Adequate Reserves: One of the biggest risks in real estate investing is unexpected expenses. Ensure you have sufficient reserves to cover repairs, maintenance, and other unforeseen costs. Aim for at least six months' worth of expenses in reserves for each property.
• Choose Good Locations: The age-old adage in real estate is "location, location, location." Avoid buying properties in undesirable areas just because they seem like a good deal on paper. Good locations attract reliable tenants and help mitigate the risk of high tenant turnover, evictions, and property destruction.
• Accurately Estimate Rehab Costs: Whether you're a beginner or an experienced investor, it's easy to underestimate rehab costs. Always assume that rehabs will go over budget and give yourself a cushion in your budget to account for overages.
• Take Baby Steps: Start small and gain experience as you go. Consider investing in a crowdfunding deal or syndication to dip your toes in the water without risking a large amount of capital. As you gain confidence and knowledge, you can gradually increase the size and complexity of your investments.
• Recognize Fear as a Limiting Belief: Often, our fears are what hold us back from achieving our full potential. Recognize that these fears are "limiting beliefs" and work on addressing and overcoming them. Take calculated risks and learn from your mistakes along the way.
• Don't Follow the Herd: Making investment decisions based on what others are doing can be risky. Just because everyone else is buying doesn't mean you should too. Make decisions based on sound financial principles, cash flow, ROI, and a solid long-term plan.

Remember, fear can be a healthy emotion that keeps us vigilant, but it should not paralyze us. By understanding and addressing your fears, you can take control of your financial future and work towards achieving your real estate investment goals.

Difficulty saving for a deposit

High Cost of Living

The cost of living has been increasing drastically, leaving less money for savings. Expenses such as bills, rent or mortgage, groceries, petrol, and insurance can take up a significant portion of one's income, making it challenging to set aside a substantial amount for a real estate deposit.

Debt Obligations

Many individuals struggle with debt, which can hinder their ability to save for a deposit. It is crucial to differentiate between good debt and bad debt. Good debt includes investments that grow in value or generate income, such as a mortgage or student loan. Bad debt, on the other hand, funds one's lifestyle or purchases items that depreciate in value, like credit card debt or car loans. To save effectively for a real estate deposit, focus on eliminating bad debt first.

Income and Expenses

Assessing one's financial situation is essential to understanding how much can be allocated towards savings. This includes evaluating income, expenses, and debt-to-income ratio. By increasing income through promotions, side hustles, or small businesses, and reducing expenses on non-essentials such as dining out, entertainment, and subscriptions, individuals can accelerate their savings for a real estate deposit.

Interest Rates and Wage Growth

Prospective homebuyers face the challenge of low-interest rates on their savings, which means their deposits earn minimal returns. Additionally, wage growth often fails to keep up with the rapid increase in housing prices, making it difficult to save for a deposit that covers the required percentage of the total cost.

Strategies for Saving

To overcome these challenges, individuals can consider the following strategies:

• Create a budget and stick to it. Track income and expenses to understand where adjustments can be made.
• Set up a separate savings account dedicated to the real estate deposit and automate savings by having a portion of the income directly deposited into this account.
• Explore high-interest savings accounts or investments, such as exchange-traded funds (ETFs) or term deposits, to maximize returns on savings.
• Take advantage of government support, such as first homebuyer grants and stamp duty concessions.
• Consistently save a portion of each paycheck and add any tax returns or bonuses to build a substantial sum over time.

While saving for a real estate deposit can be challenging, implementing these strategies can help individuals work towards their goal of investing in real estate.

High transaction costs

Across the world, governments add to these costs by taking a portion of the sale proceeds, such as through a stamp duty. In some places, the government charges a conveyance fee for transferring the property title, and there may be additional taxes, such as the ad-valorem tax. These statutory costs are a huge expense and act as a significant deterrent to buyers and sellers, making flipping properties a difficult and expensive process.

Lenders also charge transaction fees, such as a processing fee for handling the mortgage agreement, and there are various other charges for services provided by the lender. All of these costs add up and can quickly burn through a budget if they are not accounted for in advance. As such, investing in real estate is a long-term strategy, and the complexity of the transaction costs involved makes it very different from flipping stocks or bonds.

Low returns and high expenses

Real estate investments are known for providing low returns. Traditionally, the returns on real estate investments have been less than the rate of inflation. It is only recently that there was a sudden spike in the capital appreciation earned on real estate. Rentals are also negligible, and it can be difficult to rent out houses. Therefore, there is an element of risk involved. Overall, the returns earned by real estate are comparable to risk-free investments, even though a lot of risks have to be taken. This makes realty a bad bet for the middle class.

The problem with real estate is that it forces a person to settle down in one geographical area. Due to the high transaction costs mentioned previously, real estate cannot be bought and sold frequently. This is a problem because, in this era of layoffs and job changes, owning a house is more of a liability than an asset.

As mentioned before, real estate purchases are usually leveraged. This means that people are paying large chunks of their income in interest. All these payments are made with the assumption that real estate prices will rise. However, the problem is that if the prices don't rise, investors stand to lose a lot of money.

It is important to understand that the price doesn't need to fall for investors to lose money. Even if the price stays stagnant, investors have already lost a huge chunk of their savings, which they paid out in interest. Lastly, since real estate consumes most of the salary that a middle-class person earns, it consumes most of their portfolio.

Instead of having a balanced portfolio that protects investors in the event of a downturn, most of the savings of the middle class are in the housing market. This is why, when the housing market crashed in 2008, the entire economy went into a recession.

Frequently asked questions