Every industry has its fair share of myths and misconceptions, the investment property business is no different. By trying to dispel some of the myths associated with property investment, we hope to help property investors separate the facts from fiction and understand a little more about some of the more common phrases used in the industry.
Myth 1 – You need to invest time as well as money:
You no longer need to dedicate vast amounts of personal time in order to manage property investments. In the case of buying and selling (flipping), many companies now exist to manage the process for you, even down to assisting with renovations and rebuilds. Obviously they will charge for this, but nevertheless, it is possible to run very large portfolios at a profit in this manner.
Similarly with Buy to Let, management and service companies exist that will take care of virtually everything right down to the tenants if needs be. Of course if you want to invest your time, you can. Hiring a company will rarely guarantee you a profit either, but the choice to invest in property without taking up vast amounts of time is possible.
This is not to say spend no time on your investment decisions, but more strike a happy medium. (See myth 8)
Myth 2 – You need to be an expert to make a good return on investment from property:
Property investment is simpler to understand than many other investment types, such as stocks and shares. It is a learning process - by carrying out research and gaining credible advice, property investment should bring a good return. There is plenty of advice and many tools available to potential property investors, the reputable ones will help you with your property investment goals.
Myth 3 – Property investment is too risky:
No investment is without risk (it wouldn't technically be an investment if there were no risk!), but some are riskier than others. It depends on how much the investment is geared or leveraged, how much capital is invested.
The property market has a slower cycle than the stock market, making it less susceptible to short term volatility. In essence, if the property market is to fall 40% in a region, it will typically take quite some time for that to happen (many months). In the case of stocks and shares, a fall of that magnitude can happen in hours based on bad news or rumours. In the extreme with commodities such as oil, where high levels of leverage are used, a 40% drop can happen in minutes.
With stocks and the like, it is arguably easier to halt your losses more quickly if you use predefined sell orders or stop losses, but these are by no means infallible if the market is moving quickly. Whilst property can rarely be sold with phone call or click on a trading platform, the chances of recovery are more likely, and said property is still tangible collateral if you own it outright or have positive equity.
Myth 4 – No money down means an investment without cost:
In recent years "no money down options" have been touted as the next big thing in the property world. Very few however, actually live up to the claims and finding reports of successful profit making, no money down investors are a little thin on the ground to say the least. Usually these types of investment only mean no initial deposit on the property. - There will be other things to pay for such as tax, insurance, legal fees, surveyors and so on. So, money is needed to invest in property, if it weren't investment utopia would reign, and I would be out of a job.
Myth 5 – You need lots of money to invest in property:
Once upon a time, this was very much the case until higher percentage mortgages were more freely available, though even then, hefty deposits were (and sometimes still are) required. There are still ways to invest into property and take advantage of the real estate sector without having to take out a loan.
Over the past few years REITs (Real Estate Investment Trusts) have flourished, as have Property Investment Funds (PIFs), Property Investment Notes (PINs) and not forgetting IPIN's own Secure Exit Strategy (SES). All of these enable investors to take advantage of growth sectors in the market, without actually owning any property at all.
Myth 6 – All property is a good investment:
Not all property is an ideal investment. Due diligence and research needs to be undertaken on the property and location. The amount of capital and the expectations of the investor will depend on the type of property investment they choose, as well as the level of risk they care to endure.
Extreme as an example it might be, take what was billed initially to be the world's tallest hotel in 1989 (The Ryugyong Hotel). At the time, without knowing any more, one might be inclined to think owning a few rooms in a development like that could be a nice little earner. That is until:
- You discover it is being built in North Korea.
- 21 years on, it is still not finished.
Whilst hindsight is a wonderful thing, even the North Korean Government was unable to attract foreign investment into the project, despite promising "relaxed oversight". There is still a remote possibility the project could be finished one day; Egypt's Orascom Group is now involved apparently, after having cut some kind of vaguely disclosed deal to run North Korea's mobile phone network.
Myth 7 – If you build it, they will come:
Every industry has famous quotes attached to it, all too often unfortunately, most quotes tend to lack any real clarification. Dubai has often been associated with the Field of Dreams film line, and at present the situation in Dubai is far from mirroring the phrase. Investors, promoters and developers for the most part are not seeing anywhere near the returns they might have hoped or dreamed for.
Myth 8 – Anecdotal evidence suggested it's a good idea….
Anecdotal evidence in its own right is somewhat of a misnomer, regardless of what it is about. The press at large though often tend to play on it for the sake of news in today's very "noisy" media circus.
In the past few years we have seen the sharp rise and even sharper fall of high profile property investment companies/celebrities/seminar providers/inspirational speakers/gurus etc. only to see in most cases that the everyday investor didn't actually make a profit at all. Just because a new project or development or method might be making headlines, it doesn't mean there is a profit in it for the end user. It's worth remembering it was once thought the world was flat, and for many years people continued to believe it because it was what they were told by those that dismissed science.
Take some time to assess whether a project is capable of making money. A recent survey showed that British homebuyers spent on average just 21 minutes to buy a house.
Whether the 21 minutes is to buy a home to live in, or an investment property, it is not much time to make a decision about what will be the largest single transaction you will ever make.
Myth 9 – Below Market Value guarantees you an instant profit.
Not true. Quite simply, it is all down to whom and how the market value at the time is defined. Ask any bank to value a house, and then ask the bank what they will give you for it. The 2 figures are likely to be very different. The reality of "Below Market Value" (BMV) is whilst the property might be a good deal, and it might offer a profit on paper, there is no actual profit to the buyer until the property is sold. There are deals to be found which are genuinely below market value, but they are hardly "instant" and should certainly be verified prior to diving in.
Myth 10 – Emerging markets are a sure fire way to make a profit.
Again, whilst hindsight is a wonderful thing, the markets that were once billed as "emerging" at the time they made the general press (for example Estonia, Bulgaria, Poland, Dubai etc), promoters had already seen vast profits made by arguably unwitting investors speculating independently (i.e. buying odd bits of land here and there). This is not to say there is no money to be made by getting into a region with potential growth early on, but investors that have reached the realms of the "super wealthy" from property in recent years, have usually done so by owning large amounts of land that they have sold on to high profile developers, long before the area has been billed as "emerging" later on by the promoters.
If hard statistics were available on emerging market investments, I don't doubt for an instant that the number of "super losses" would far outweigh the "super gains" made by investors. The reality is that no-one likes to publicise losses or failure. Successful emerging market investing involves extensive understanding of risk and reward ratios, as well as knowledge of the market variables involved and undertaking extensive due diligence. Even with all of that done, the "emerging market" itself still has to "emerge", something most of us will have no control over.
These are just a few myths surrounding the property investment industry. Before you choose to invest in property be sure you research into any myths you may have heard and don't just rely solely on them because you may lose out in the long run.
Have you heard a potential property myth? Let us know in the comments below!
- Wednesday 14 July 2010