3 Real Estate Myths That Will Send Your Head Spinning
Real estate is undoubtedly one of the assets that people categorize as class A. Because even when you have never even classified your assets before, banks will still accept them as collateral for secured loans.
Flippers will always be willing to pay a price for it no matter how run down it is. And if you are to give it away for half price, there will always be a beeline of people waiting to pounce.
It is no wonder real estate is the number one asset that is discussed online and offline. They don’t just take up the business section of daily newspapers, they take up the main news sections and even the entertainment pull-outs too.
It is due to this great amount of content being created around it that myths are created and gain traction as time goes by.
Just look at any news topics that get public attention over time. No matter how much in love the public is with a story or celebrity, sooner or later, some dirt is going to come to the surface.
There more a subject is being discussed, the more myths and conspiracy theories follow suit.
So it is no surprise that there are many half-truths that orbit around real estate. And many of them are found in sales training materials created through brain-storming sessions conducted by managers seated around a meeting table.
You see, real estate is a big ticket item. Every transaction has a considerable amount of money involved. And when you put together a highly priced product with a willing buyer, it’s a sure combination to attract scavengers ever-ready to pick on the bones. And so… myths are magically planted in the sands of time.
Myth #1 – A home is a great investment
There is just so many things wrong with this statement that I don’t know where to begin.
Let just say firstly that an investment is supposed to make you a return. Have your partner or your children ever paid you rent for sharing the same roof as you? If not, then it cannot be considered an investment grade asset.
Can you imagine the look you will get your wife if you ask her to pay rent?
The only party that will consider a home as an investment is the bank. They loaned you a specific amount of money and will continue to receive recurring payments that include a profit(interest) that jacks up their bottom line.
The lender is only at the top your expenses statement. There are utility bills to settle, repair expenses to contend with, maintenance charges to haggle over, property taxes to satisfy the authorities, etc. And you might even be a compulsive spender when it comes to your living space.
So when you are paying more than what you supposedly bought the house for, how can it be an investment?
The smartass in a pushy salesman will then bring your trance of thought to the fact that real estate values rise over time. Pretty soon the house you bought will be worth at least DOUBLE what you paid for.
Well take a couple of steps back, junior.
Real estate values rise over time simply because of the effects of inflation. Yes your property might do 1% or 2% above inflation each year. But that is hardly something you can boast about at the investing networking session.
You are just barely keeping up with inflation. And maybe even a simple time deposit might exceed the appreciation of your home. And that’s even without mentioning that the valuation gains are just paper gains, while time deposits are cold hard cash.
An investment guru in a power suit might insist that you can downsize to a smaller house in the future and gain access to the equity locked in the house.
Of course you can do that. But after deducting expenses like commissions, legal fees, repair costs, and other closing costs, you are often making a loss when adjusted to inflation over the years.
And let’s not even talk about home equity loans. Just when you have finally got close to being debt-free, do you really want to get yourself into a second lifetime of debt?
If after working these numbers, somebody still insists that a home is an investment, then he must be referring to a losing investment.
Myth #2 – Always buy instead of just renting
I wouldn’t bet against you hearing that out of a real estate agent’s gap. Where else are you going to get that from?
Let’s just throw aside the fact the agents get their payoff from transactions happening. When they can make as much as 5% of purchase price, why would an agent settle for a 1-month rental fee as remuneration. So it became like a broken record to hear agents suggesting to buy instead of rent.
But if you just be pragmatic for a moment and think through the facts, you could realize that you rather be a contradictor.
The reason why many home buyers get convinced with this myth is that they are working with selective information. They become so focused on the capital outlay and potential future sale that they become blind to the miscellaneous expenses that are obvious to a bystander.
Here is a small list of expenses you will incur when you own a house.
- Furniture, electrical appliances, and interior design
- Repairs and maintenance
- Housekeeping costs
Here is the cost of renting a place
Which option do you feel is more costly?
Again, you might argue that you get everything back if you sell the house in future. Are you sure? Are you even certain that you will sell it? Go read the last section on myth #1 again.
Myth #3 – Real estate values can only go up
In what planet have you been living on?
Real estate crashes are not just a recent memory. Some call it a hiccup. But they have happened over and over again throughout history.
I am aware that prices are higher now than they are a century ago. But the rise is more attributed to inflation rather than real value appreciation. Because as previously mentioned, getting out of your “investment” with profits is not a god given right even if you sell your house at twice the price you paid for it.
Real estate cycles exist because there are always ups and downs caused by demand and supply. Due to the laggy nature of getting houses built, there will always be a gap between demand and supply, one way or another.
If an “expert” tell you that real estate prices will always rise, it should send an instant alert trigger to your BS-meter. Because this person obviously is not telling the truth or really clueless about real estate.
If property prices can only go up, no investor will ever go bankrupt. Every agent will quit their jobs and buy as much as they possibly can. And there will no longer be the need for business schools as everyone can retire just by buying real estate.
I don’t expect to convince many readers on the subject I’m tackling here. Because the perception that we have on real estate have been conditioned on our minds from young. But please, buy a house for the right reasons instead of the myths.