In this article you will find out more about:
Myths About Owning Real Estate
Disclaimer: For better readability the following text contains sarcastic exaggerations. Therefore, take it easy, nice and slow - and enjoy! 😎
Depending on the geographical region and cultural background, investing into your own real estate property is often a top priority in one’s life. In some Eastern European countries, renting is out - only owning is cool!
Well-Known Advantages of Owning Real Estate
Who did not hear in circles of friends or colleagues arguments pro real estate investments like:
‘Best protection against inflation’ - the famous ‘concrete gold’ argument or even better
‘after signing the buying contract for my apartment, prices already went up by 10% even before the first concrete floor had dried’ - the myth of prices for real estate always going north and finally
to hold your own real estate piece is the nicest experience you can make - especially at such low interest rate levels. Really? 🧐
Property Starts with P - P Like Pain 😉
The Time-Consuming Search for Your Dream Property
After hearing from everybody how beneficial the ownership of an apartment or house is, you start cracking your head and spending your valuable free time to find a piece of land plot or apartment project you want to buy in. Soon your fingers start hurting from dialing countless mobile numbers to prepare your shortlist for visits, then your ears are suffering from hearing always the same advertisement speech from real estate agents. Either not in the desired area in town - contrary to what the agent told you on the phone - next to a concrete-tower without any chance to catch some daylight, too pricy in general or already sold out… you choose.
Disillusioning Reality versus Dreamlike Real Estate Advertising
Let’s just assume, you are lucky and after quite some time you found your piece of love in form of a nice 3 rooms apartment. Ok, you enter directly into the living room without any place for a coat rack, room doors principally are placed into corners without considering some space to place something behind – 3 rooms, did they also consider living room and open kitchen as two separate rooms? And do you really want your partner entering the double bed by always crawling over you since there is no space left around the bed? Just highlighting some of the true advantages of your final candidate. Empty, the rooms look spacious – will it remain the same with furniture in? Let’s keep fingers crossed! 😎
Challenges of Financing a Real Estate Project
Good, first part accomplished: you played the seller’s most beloved song “I want to buy” – now let’s talk financials.
If you are lucky, you pay for your house or apartment in cash. No mortgage – no payment duties. Ah, you are a freelancer? Then better forget about a mortgage and bring your own cash – which bank would be willing to finance you?
But majority of us don’t have the financial resources to pay from savings. Governmental programs might help if our own seed capital is insufficient for obtaining bank financing. Still, in times of increasing interest rates and variable interests for mortgage loans running 20+ years there might be lots of surprises on the way.
Coming back to the low interest level argument from the beginning: is it really cheaper to finance real estate at the moment? From the interest rate level: yes – but prices for real estate also went up. So, at the end, it might not be that cheap overall.
In the meantime, while still paying down your mortgage every month, the first renovation works could wait around the corner – latest after 8 years, the walls are crying for fresh paint. Not a problem – well-maintained property should keep better its value. But the toolbox for doing repair works yourself is eating up more and more space in the storage room. And do you have the time for do-it-yourself? Is renting maybe the better solution? Let’s see.
Recent Trends Impacting Real Estate Investing
Latest since the pandemic in 2020, the new ways of working have ended abruptly our daily routine to go to work and surely will continue to characterize our future work life. But what does it mean for us as real estate owners?
New Ways of Working = Need for More Space at Home = Higher Cost
Demand will increase for homes with minimum one additional room or separated corner to work from. At least in my friends’ circle discussions evolved around that topic: “we are looking for a bigger apartment since we are both working from home” – more precisely, her from the kitchen and him from the bedroom as due to open kitchen concept a separate living room is inexistent.
The consequences are clear: the more space – the more money is needed. Do we want to cut from our travel budget to finance the extra room? Ok, let’s skip the extra room – anyhow, we will switch to teleworking. Working from the coffee shop around the corner or a nice and sunny place is even cooler. But do you need to own an expensive property for that?
Your Own Real Estate Property Binds You to A Location
Besides new ways of working, are you sure you will still work that long for the same company? Don’t you need to keep flexibility to be able to change town for new great opportunities? After the experience made with your current apartment, selling, and starting from the beginning with searching for a new apartment might not be an option. It will take some time to find a buyer for a decent price. Besides, will you be allowed to participate in Governmental programs for real estate for a second time?
If selling is not an option, let others pay the mortgage for us: we rent our apartment and buy a new one. How smart is that?
Renting out Real Estate - Still a Good Idea?
Finding The Right Tenant Can Be A Major Challenge
Renting your apartment is like the buying process: instead of searching real estate you need to look for tenants. Ideally, non-smoking, without huge or creeping pets, the fewer children the better – ah, and with the financial strength to feed your mortgage rate in the most reliable way, of course. So, arranging for visits – except you want to handover your first rental income to the real estate agent, going to the apartment, waiting for the potential tenants, explaining and “selling” your piece of real estate as being worth the money you are asking for every month.
After some time, the tenant found your apartment, or you found the tenant. Rental contract was signed, and payments are coming in, later than agreed but money is coming – your mortgage is decreasing micro-incrementally. So far so good. After 12 months, if you are lucky, a bit later, you receive that call or message every landlord/lady hates so much: your tenant wants to change location and therefore terminate the rental agreement. In the Monopoly game that was called: go back to start and try again. Yeah!
Leaving Tenants - The Chances for Bad Surprises Are High
While preparing the handover document with the leaving tenant, your mood is becoming better and better: painting is not enough, holes in walls need to be filled, parquet partially to be exchanged, furniture to be replaced due to spots or damages. Ah, piece of cake – the security deposit from the rental agreement will lower the pain. Certainly! If it does, you as owner are running after things to be done. It is your time!
Real Estate Property Requires Maintenance to Keep Its Value
Besides the further above-described search and find effort, you as owner have to ensure that the property stays in good shape in order not to give your tenant reasons to reduce or even stop paying rent, or better mortgage rate. Since you are out of town or your hands are golden but not for repair works, there is need to bring in a craftsman to do the job. Did you ever try to get one for only minor repair works like exchanging a water tap? Good luck! If you succeed, most likely your hands become less golden but the water tap the more. 😉
The Truth about Price Development of Real Estate
Finally, after being enriched by less good and more bad experiences with your property, you decided to sell. Now it’s time to cash in the magic profits everybody is talking about in the real estate market. But oh lala, over the years there were developed some other fancy apartment buildings in town. Areas became out of fashion (unfortunately the one your apartment is located), different type of buildings are in demand (e.g., with less floors), political crisis or even a war in a country next door lower other potential buyers‘ appetite for real estate and the basic pricing rule of an oversupplied market might lead to quite some disappointment. In short: you might get back less money than you paid or at least not as much as you dreamed of. Latest then, it became crystal clear that real estate value seems not to be as stable as expected – you only do realize the volatility when you sell. Then your price is set.
Real Estate Investments Could Lead to Clump Risks
Last but not least a more strategic question with regards to your total asset allocation: do you really want to put almost all eggs into the same basket? Wouldn't it be better to diversify across different asset classes and regions? Then maybe a globally diversified ETF portfolio might be the better choice? What do you think?
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