Most people approach real estate investing the wrong way.
For most people, the way to invest is to buy a vacant lot or a pre-selling house & lot or condominium. Nj Department Of Insurance Complaint This is not wrong by itself but it’s wrong for most people because of the following reasons.
Buying a property then hoping it will appreciate
Buying a property without control
Buying a property without a clear plan and strategy
Mistake #1. Buying then Hoping
People buy vacant lots with the hope that the lot will appreciate in value. They look for vacant lots that they can afford to buy, pay for it and then they wait. You could end up waiting a long time because appreciation is not automatic as many real estate salesmen would have you believe.
This is called the Buy and Hope strategy. You buy and hope it appreciates.
Yes, real estate normally appreciates with inflation. I’m sure you’ve heard of stories of your grandparents buying a vacant lot for Php1 per sqm then selling the same lot for Php1,000 per sqm. But sometimes you have to ask how that happened and how long did it take. If it took 20 years then you have to wait the same amount of time before you start thinking of selling your lot.
Real estate appreciates not just through inflation but also through changes in the area. It could suddenly appreciate if SM suddenly bought the lot right across and built a new mall.
The government could suddenly decide to make the surrounding area a focus for development by building up the infrastructure near the area and encouraging businesses to invest.
The town or area where your lot is over time experienced an economic boomand demand for real estate increased.
Also, these are all external factors that you cannot control. The only time it makes sense to buy a vacant lot is if you have already have a plan to use it or you have reliable information on developments in the area. You’re not basing your decision on hope but on correct information.
Of course, if your lot is located in the mountains or in the middle of rice fields, away from the developments, you won’t reap the rewards.
Mistake #2. Buying without control
The other common way that people invest in real estate is to buy a house & lot or condominium at the pre-selling stage. At this stage, the down payment can usually be spread over a period of time, making the acquisition affordable.
If you are going to live in the property, then this is perfectly fine. It’s better if you buy it earlier so you can lock in the property at the lower price and better terms.
Developers normally increase the price of pre-selling projects by as much as 10% each year until the project is completed. This price increase depends on market conditions – the higher the demand for units in that project, the higher and more often the price increases.
If you buy a pre-selling property with the hope that you can sell it later at a higher price then again you are putting yourself in an uncertain situation. You are making a number of bets outside your control.
You’re betting that the developer will complete the project on time. A lot of developers don’t deliver on time. A number also force turnover even though the development is not yet complete.
You’re betting that there will be a buyer for your property upon turnover. What if there’s none? What if there’s an over-supply of condominiums in the area?
You’re betting that the quality of the development is the same quality as what the agent showed you in the showroom. The showroom is just that – a show. It’s not the finished product.
This post is not meant to trash developers. In fact there are some that really do build quality work and actually has resale value by the time you get it.
This is not about developers but this is about you, the newbie investor.
Developers have a clear plan and strategy. Types Of Real Estate Partnerships The same cannot be said for new investors.
Mistake #3. Buying without a clear plan and strategy
Many people just go by what they have heard or seen others do. That’s why we have a lot of people buying lots because they heard a story from somebody else.
Many people listen to sales pitches, not knowing the difference between a sales pitch and sound investment strategy.
All businesses have a plan to separate you from your money. Your business is to make sure that you keep your money.
The right way to invest is to treat real estate like a business. Any successful business has a good business plan that is based on facts and not on opinion or guesswork. A good business plan has clear action steps, firm objectives and has control over most factors that will affect the business. It has backup plans if things don’t go as planned.
I repeat, the key to successful real estate investing is to treat it as a business. It’s not a place to just park your money. It’s not an asset that will grow automatically or give income automatically either. You have to treat it as a business and set it up as a business.
Now, is it still possible to run a real estate business in your spare time? The answer is still yes.
In my next post, I will share the first step in setting up your real estate business. Hint. It’s not setting up your corporation.