Amid all investment options among all investment options, real estate is the most popular choice for buyers to be emotionally attached to. This is why buyers rationalize their decisions using a variety of falsehoods regarding investing in real estate.
Suppose one wishes to avoid becoming entangled in emotions of real estate investment and make sound financial decisions. In that case, these myths about real estate must be dispelled and recognized. In the following article, we’ll look at some of the most important real estate investing myths and attempt to dispel these myths.
Myth: Land is Scarce
The most commonly cited myth perpetuated by real estate agents and other promoters of investing in real estate concerns the notion that land cannot be plentiful. There is a finite amount of land around the world. This, in conjunction with the fact that the world’s population is growing daily, supports the idea that land prices will increase in perpetuity because there is always a shortage of land.
But glancing at the figures will show that there is a better situation. First, it’s accurate that there is only a tiny amount of land worldwide. However, technological advancements are helping to make the most efficient utilization of the land. Studies have been conducted in this region, and the results show that even if the world population increased by fourfold, it would be plenty of land to allow all humankind to thrive and survive!
Additionally, studies have been conducted that show the world’s population is poised to stabilize. This implies that the population increase has reached its highest point and will remain relatively constant.
Therefore, the “land is scarce and therefore precious” logic is nothing more than a propagation of the myth!
Myth: Land Prices Always Go Up in Value
This thinking is common in emerging economies that have seen massive residential real estate market growth over the past ten years. The land cost within these nations has risen by 10 percent over the last two years. In the end, those living in these nations have been taught that the cost of land is increasing continually, i.e., the property always goes higher in value.
It’s far from the reality. If you look at the advanced economies of Japan as well as those in the United States, one can see instances of real estate market crashes that have seen prices drop to 40% – 50 percent. The price has been falling in Japan and has tended to fall for most of the last ten years.
Thus, once again, “land prices always appreciate in value” is an untrue statement. Land prices are correlated to numerous factors. One of them is the overall health of the economy as a whole.
Myth: Past Performance Predicts Future Performance
There is a trend among hopeful property investors to overstate the trends evident in the market for property in the past and then make up a very bullish scenario. But, it is essential to recognize that the world has experienced a significant shift over the last ten years. Organizations that outsource, free trade, and international investments made by multinationals caused a massive boom in emerging economies. The future doesn’t bring any revolution of this kind. If no unanticipated economic shift fundamentally alters the paradigm of economics and is highly likely that the results seen over the last few years will be repeated in the next few years. Investors who bet on a repeat performance can expect shock!
Myth: Real Estate Investments Can Be Flipped Easily
This isn’t a well-known legend. In the past, before the subprime crisis began to rage within the United States, stories of self-made real estate millionaires who owe their success to nothing more than purchasing and selling property using loans were not uncommon.
They emphasized the benefits of flipping, i.e., purchasing the property several times over a brief time. The goal was to capture the gain from the price difference and convert the cash. But, they failed to mention the massive cost of transaction fees which are part of any real estate transaction across the globe. So, the more properties you purchase, the greater the transaction costs you will incur. These transaction costs range from 2 to 5 percent of the property you want to buy.
Along with the transaction costs, Finding a buyer and negotiating a deal can be time-consuming and lengthy. Flipping houses causes a massive loss of time and resources and is best avoided in all respects.
Myth: Buying is Better Than Renting
Buyers of property all over the globe have an emotional connection to the property they buy. In the past, purchasing real estate was considered the “adult” thing to do for someone. The decision is not based on financial support and is rooted in the notion that owning a home that is yours will make you financially secure.
If we take into consideration the financial aspect, this is different. There are instances where purchasing is the best option, but there are many situations in which renting is the most appropriate option. The right choice is based on a case-by-case basis. The rent or buy. The purchase decision will be addressed in a subsequent article.