Seven Reasons Why Real Estate Is a Poor Investment
For most people all over the world, owning a home is a fantasy. This explains why housing expenditure is disproportionately higher in the middle class. Stock markets are seldom used by the middle class. On the other hand, almost every person with a middle-class salary in America, if not the entire world, owns real estate. Furthermore, the majority of people who own real estate do not purchase it outright. Instead, they borrow money to purchase it. This investment decision has a huge effect on their lives. In America, the word "house poor" is used. This word applies to people who receive a fair amount of money. They must, however, live in poverty because they owe the majority of their money to banks in the form of mortgage payments. Houses in Qatar For Sale | Houses For sale in The Pearl Qatar
The millennial generation is gradually realizing that the real estate dream may not be worth it. This is why millennials choose to spend their money on travel and education rather than on a home. A house has traditionally been thought of as an investment. We'll go through seven big reasons why buying a house isn't a good investment in this post.
Irregular
Investments are advantageous because they can be quickly sold as needed. Take, for example, stocks and bonds. These investments have a ready market where they can be quickly converted into cash. The same can be said for precious metals investments such as gold and silver. Real estate is potentially the only illiquid asset in the portfolios of middle-class investors. In any industry, selling real estate is difficult. It's even more difficult during downturns, and sellers are often forced to wait six months to a year to receive cash in lieu of their land. As a result, the middle class can avoid spending a significant portion of their portfolio in an asset class from which they cannot quickly withdraw funds.
opacity
Not only is the real estate market illiquid, but it is still opaque. In the case of stocks, shares, and other securities, listed prices and transaction prices are identical. In the case of real estate, however, the quoted prices vary significantly from the rates at which transactions actually occur. A buyer's ability to determine the right purchase price is extremely difficult. If buyers and sellers aren't vigilant, they can be taken advantage of by unscrupulous middlemen.
Costs of Purchases
Transaction costs in real estate are also unusually high. To begin with, each time a sale is made, the government is required to receive a large amount of money. There are also costs involved in a real estate sale, such as legal fees, brokerage fees, and valuation fees. As a result, approximately 10% of the value of each transaction is lost to transaction costs. This also adds to the previously discussed illiquidity point. The bottom line is that, due to the high purchase costs, investors are stuck with the property they bought, even if it turns out to be a mistake.
Low Returns and High Expenses
Real estate investments are notorious for yielding low profits. The returns on real estate assets have traditionally been lower than the rate of inflation. Only in the last few years has there been a large rise in real estate capital appreciation. The rental income is also insignificant. In addition, earning rent necessitates a significant investment of time, resources, and effort. Furthermore, it is often difficult to rent out apartments. As a result, there is a degree of risk involved.
Overall, real estate returns are equivalent to risk-free investments, despite the fact that certain risks must be taken. This is why real estate is a poor investment for the middle class.
Possibility of seeking jobs
Purchasing real estate forces a person to settle down in a specific location. Real estate cannot be purchased and sold often due to the above-mentioned transaction costs. The problem with staying in one place is that your choices are severely limited. This is why millennials have chosen not to purchase a home. Owning a home is more of a liability than an advantage in this age of layoffs and work changes.
Utilized
Real estate acquisitions are often leveraged, as previously stated. This suggests that people are paying interest on a substantial portion of their profits. Many of these payments are based on the expectation that real estate values will increase. The issue is that if rates do not increase, investors will lose a significant amount of money. It is important to realize that the price does not have to fall in order for investors to lose money. Even if the price remains unchanged, investors have already lost a significant portion of their assets that they had paid out in interest.
There is no diversification.
Finally, since real estate absorbs the majority of a middle-class person's salary, it often consumes the majority of their portfolio. Rather than having a well-balanced portfolio that protects investors in the event of a downturn, the majority of middle-class assets are invested in the housing sector. This is why, when the housing market crashed in 2008, the whole economy collapsed.
In the end, “buying a house as soon as you can” is obsolete advice. Millennials are well aware of the numerous financial traps that come with home ownership.