Real estate is one of, if not the trickiest and riskiest form of investment. There are many secrets real estate holds that can make or break your investment. In this post, I will illustrate some secrets of real estate has that will affect your real estate investment.
Real Estate Is Not An Asset
Real estate is not an asset. It can be anything from a consumer good to a consumer good with an asset. That asset is land. Land can be bought individually, but not often. When real estate could be an asset to sell to broad markets, it frequently has a consumer good.
Land Is Viewed As A Commodity
There is only a fixed amount of land in the world. Sure the amount of land may change, but on average it decreases thanks to climate change, disasters, and life itself. This makes it a valuable resource. Interestingly, land itself unchanged is useless, not unlike gold. It is only when the land is transformed when it has any value.
The strange thing about land is that unlike gold almost everyone needs land in one form or another. Even if you wanted to live in a stick shack you still need land to make said shack.
The Real Estate Structure Is Viewed As A Consumer Good
While a house is frequently (and incorrectly) considered an investment it is actually a durable consumer good. At most it is considered a capital good, and that depends on who you sell to and the purpose of your real estate. Truth is, real estate only appreciates due to the appreciation of land. This is one of the harshest secrets of real estate.
You can always find ways to increase the value of your house, but in the end you will make your home more personal, otherwise it would not be your home. Those personalized changes generally lower the return of value on your house.
Even if the structure is more commercial or business oriented these are just capital goods as these assets do not necessarily contribute to production without further development or work.
Real Estate Requires Significant Borrowing
Only around 20% of houses are occupied by an owner without a mortgage. That means at least 80% have to pull out a mortgage (chances are a good amount of the 20% did have a mortgage and paid it off). Considering the fact that the median down payment is 6%, that would mean you would have to borrow over fifteen times the amount you have actually “invested” in your property.
Would you ever recommend someone to borrow that amount to invest in stocks, bonds, or any other asset? Some may say it depends on whether the asset can make a higher return of investment than the rate of interest. But with fees and the volatility of markets even during good times this is at least a risky financial move. Furthermore, almost everyone I know who recommends borrowing to invest in stocks never recommends borrowing more than four times the amount you actually invest.
Appreciation Is Not Enough To Cover Losses Of Your House
The national appreciation rate is less than 4%, hardly even beating inflation. Many homeowners will not have an APR that is lower than the appreciation rate. In other words, many will have borrowed a large amount of money for an “investment” that could have an average APR larger than appreciation. Coupled with the APR on the house and inflation, you are sinking easily a few percentages in money for your “investment.” And this is when mortgage rates are at their lowest.
If you want to sell your home or take out a loan to actually cash in on your investment this will require hefty fees equal to 2-5% of the home value. Furthermore, the consumer good on the land is volatile in value due to emotions, your property may not be appreciating. One of the secrets of real estate is that buying a house is far from always a successful investment even with appreciation.
Real estate is not always an asset. The only real estate that is an asset is one where the owner has land. The structure on the land is almost exclusively a consumer good. Consumer good values can be affected by emotions, but real estate value can especially be affected emotion.
More often than not, this is a good thing. As diverse as people are we all have surprisingly similar needs. Everyone wants to feel at home after a long day. People are…predictable, making them feel at home is surprisingly simple. All it takes is a whiff of mint, cinnamon, sometimes fresh baked goods and people can lower their guards. Come on, you all know it is true. Just try to be angry after coming home to the smell of fresh baked bread. If you can I will take back what I said.
No one really wants land alone, unless they want to develop on that land. They want the warm and comfortable consumer good on that land. Some may say they want a place to live for shelter, but you do not need windows that let in natural light nor high end appliances for shelter. Real estate may provide the house, but the residents make it a home. Making real estate feel more homely can increase demand for the house or even have someone agree to a higher price. If you are a real estate investor you can use these secrets of real estate to ease you on your path to forge your wealth.
Real Estate Is Speculative
While you can easily raise the price of your real estate by emotional responses, that means that the value is highly speculative. Real estate is literally real, but it is not equal in value to labor and materials. While every seller is looking to profit off of their goods, real estate itself has no productive value. Unlike stocks and bonds, there is no value real estate ownership truly provides the owner. You will have to sell this real estate to others while telling them either more people will want it and increase the value, or that the real estate will give them something emotionally. Owning the house will never give you a quarterly dividend, nor will any board of directors ask for more property buys to raise housing prices (the latter is possible).
The value of a house is almost entirely dependent on the desires for home ownership. Sure, stocks may be something driven by emotion, but no one would ever buy a piece of paper without at least expecting money back. Real estate is not the same. Some people will buy real estate just to have or live in it without expecting money back. Also it is easy to find a substitute for real estate. You can always find another house or commercial complex with little difference between the two for different values. Many businesses have a unique portfolio which can be protected by patents and trade secrets and a good substitute is not always available.
Real Estate Kind Of Sells Itself
However, if you want to give the buyers the idea that real estate is something they want emotionally that is easy. After all, freedom, your own space, and a place you can truly call your own is priceless. That line is used by everyone trying to sell real estate for a reason. It works almost every time!
Real estate may be the hardest thing to justify buying, but it never needed a reason, people justify buying it as they go along. As long as you can utilize someone’s emotions to try to buy something (which every sales person does) it will sell with relative ease.