Failures and learn real estate investments
If you are not making 10% annually from your real estate investments on average, than that is a failed investment. While 20 to 30% failures are acceptable, keep failing regularly and then it is time to reconsider your strategy for real estate investments. In order to learn real estate investments you must go through the reasons for failing. Before you continue reading this blog further I would want you to read this famous quote below:
1. Following the crowd mentality
So you heard that a certain area/sector is attracting a lot of investors. Chances are that by the time you have heard about it, prices have already soared higher. However knowing that people you know have also invested in that area, some how it gives you a false sense of security. You invest but most of the times you do not gain much or end up losing some money.
Just because others are doing it does not mean it is right. No matter what, you must do your own analysis and research before jumping onboard.
The false sense of security while investing with crowd is not going to save you from losing your money.
As a basic human psychology, we feel secure when investing with crowd mentality. However if we look closely we will realize that only 10 to 20% of the investors actually succeed making real money from real estate and all your life you have been following the other 80%.
2. Taking advice from agents
This is the second mistake most people make and probably the most futile as well. Real estate consultants and agents are two different categories and they work differently. You need to understand who you are working with. A consultant can guide you to invest in the right places at right times, an agent simply lacks the experience to make such calls.
There is no “NO” in an agents dictionary, unlike consultant who will tell you “NO” and make you wait for the right time and opportunity.
The consultants will usually charge you a fee for advice, where as an agent will charge commission for buying or selling property. This means that a consultant’s advice is free from any commission greed. However the agent will always suggest you to sell if you own it and buy if you dont own it.
In Pakistan, however, it is a bit complicated as the concept of consultancy does not exist. That is however going to change, as Imlaak launches real estate investment consultancy services to eliminate this dilemma.
3. Listening to market noise
A lot of people really want to know everything happening in the market. Heeding this market noise is not an effective strategy because this leads to short-term thinking and over-reaction which will affect your long-term portfolio gains. Analyzing each and every event, assessing its implications on your portfolio and trying to time the market, can be a mindless task. With round-the-clock news coverage, you are bombarded with updates and flash news on various events which may not have any significant impact on your portfolios, except for the short term. Not all information is good and relevant.
Warren Buffett famously said that like dieting, successful investing is far easier to understand than to accomplish—because it requires discipline. Perhaps nowhere is investing discipline more important than regarding the never-ending din of market information blaring at investors through various outlets.
Developers and agents are well aware of this fact and they spread news & rumors which add to ‘market noise. The sole purpose is to make you believe that. It is therefore best to keep your eyes and ears closed to these daily updates and follow your long term plan and trust your analysis with discipline.
4. Selling at loss
Many people buy a property if the prices goes down they panic and want to sell it out. Two mistakes dont make a right. You made the first, when you bought it at higher price and the second mistake by selling it at the price you were supposed to buy in the first place.
I am a huge believer that you do not take profit till you sell at a higher price and you do not take a loss till you sell it at a lower price. Specially when it comes to land, no matter what the price is, the amount of land you own remains constant. There is no need to panic if prices fall below your expectations, you will not suffer a loss till you sell it.
I believe that this only happens when your initial call for investment does not cover the downside analysis. A lower price only means you miscalculated the bottom. Selling at the bottom will be your second mistake after buying it at the higher price. In addition, predicting the exact bottom or peak is hard to achieve. You are therefore good to go if you are within 20% of your purchase value.
5. Investing Long term
Many investors like to believe that holding a property for long term is going to give them huge returns. Ask any one who has invested in real estate in the long term and more than 90% will tell you they have not achieved much. Starting from files of 9 prism, to phase 7, 8 and even DHA Multan and Gujranwala the long term perspective is very very weak.
I have seen people earn very minimal profits from real estate investing in the long term. Although there may be a few examples of successful long term investments in property, they are limited and usually by chance or luck. The majority ends up making a mere 3 to 4% annually. While you can risk and invest long term in areas like Gwadar, its always advisable to invest a very small amount of your portfolio.
People who invested in long term in any society have not gained much. Take an example of Phase 7 DHA Lahore which only gained an average of 3.5% in 15 years from 2005 till 2020. The same pattern can be seen in any other private society or phases of DHA Lahore.
It is better to go for 1 to 3 years trading plans and take an exit at a good profit percentage. In addition, even if you are convinced you want to go for long term investment it is better to go for rental generating commercial real estate rather than residential plots.
6. Investing blindly in files
A lot of people have come to a belief looking at the past that buying files is a holy grail of investment. May be in the past but it is not true any more. It has become more of a gambling than an investment. People have lost money in DHA Lahore investing in commercial files specially. DHA Multan is another example of the same issue, where a huge number of balloted plots are worth less than the file prices itself. Scandals of Bahria town keep coming every other year where people are allotted more files than the available land. DHA although has the land but the location ballot makes it a risky investment.
You get a piece of paper for millions of rupees and get nothing in return. There are no timelines and there is no guarantee that you will get a good location plot. The chances of failure in my opinion are 50-50 in this case. Moreover, the file prices have soared so high that even if you do all your calculations right, it is balloting and location gambling which will decide the efficiency of your investment.
In my personal experience, investments in files are only suiteable if purchased in bulk or at considerable lower price. This makes your chances much better during balloting. However not everyone can invest huge amounts and if you are just buying 1 odd file than you are prone to failure.
7. Lack of diversification
A lot of people invest their life time savings in real estate believing it will grow multiple times. Some times just in one area thus risking all there savings while betting on success of a certain society or area. However due to various factors, misreading of market and at times failure of developers to deliver projects in time, such investments can keep stale for long time periods.
Any portfolio with total focus on one particular sector or developer, may face huge failure. This can happen when the sector growth stops or the company faces internals problems. No matter how confidant you are, it is best to keep your investment diversified. The rule of thumb is do not invest any more than 25 to 35% of your portfolio in any one sector or one property.
Diversification may be hard for people with investments below 10 Million. However, people who have more capital at their disposal should never over look this factor.
With a properly diversified portfolio, you will be minimizing risk and enhancing your holding power. Both these factors are vital for your profitability in real estate.
8. Over diversification
In order to keep risk minimum, investors start buying every where. Another purpose is that a loss in one may be covered by the profit in another. This attitude does not work because while you may make profits in some areas the losses in others will set aside the profit made in a few. To be a successful investor you must atleast have a win win ration in 75% of your investments. While diversification is important, over diversifying can be a problem as well. Over diversification ends up with an unmanageable portfolio and possibilities of missing great investments.
9. Improper balance of portfolio
I come across a lot of people who sell out there properties on loss owing to an emergency. Most of us never plan for this, but real estate should be treated as a safety deposit and some part of your portfolio should always be easily cashable.
Therefore, developing the right balance of properties to give you capital gains, liquidity and rental returns, or all three, is very important. Achieving a financial security is paramount in real estate to ensure that you have enough stability to go through hard times. Building a strong platform for your financial freedom is important. Achieving this will not only help your business or jobs but will also give you the mental stability, patience and financial stability you need to make the right choices.
Portfolio balance should be done time to time by considering age, financial positions, risk factors etc. Getting advice from the right financial planners is paramount. Lack of a proper mix can lead to huge losses of money or less profit than what you planned. For example, if a person is near to the retirement age, holding a portfolio that has a major chunk of plots and no rental properties, is putting himself on a quick path to hell.
10. Lacking discipline and patience
You purchased a property, did your analysis but things aren’t going your way. Guess what? property can be pretty unpredictable, you can make a good guess but you can not drive the market. Although you may see that everything is ripe but your investment may still under perform. You lose patience, you forget your initial plan and you end up making a wrong call. A few months later you find out that price has risen many times over as per your initial expectations. but you have already taken the exit. This is a classic example of lacking discipline and patience when it comes to real estate.
Never get emotionally compromised and always stick to your plan. Remember some things are not under our control and there may be variations in your initial calculations. You must always plan out your investment and trust your analysis and ensure follow through.
The moment you lose focus and run out of patience you are bound to a failure.
11. Trying to hit bottom or peak
We are always trying to buy at the bottom and sell at the peak. Your property is performing well but you believe the prices will go up further. This is very relevant in investments related to files or areas where speculative trading happens in property. I am sure people who failed taking profits in Bahria Town Karachi in recent past can relate to it.
Highly volatile property markets will defy logic and can move up and down very swiftly. I believe you should take an exit before prices soar too high or the expected peak and similarly buy before it really hits the expected bottom.
Most times when you are trying to catch these bottoms and peaks, you miss out on great entry and exit points. I have seen a lot of people who thought 9 Prism 1 kanal plot will reach 2 crores in the previous rally and they were willing to sell out if it did. That never happened and they are still waiting for 3 years. Not only they have failed to take advantage of the rally, they have wasted precious time.
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
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