It’s very interesting to see how myths permeate and then make a cozy little niche for themselves in our thinking. Even if the myth is proven to be well, a myth, for whatever reason, a lot of us take comfort in sticking to believing in it.
There are myths that pervade every single discipline and school of thought. Real estate is no exception. Let us take a look at some of them, and discuss why these need to be abandoned immediately.
• Myth #1 – You should hold on to your properties for an eternity.
You’ve definitely heard about this dozens of times. Folks who confidently spout the theory that you should wait interminably long to sell your properties. Decades, at the minimum, they say. Ok, so the idea is based on the truth that over time, you will get the highest value out of each individual property. This much is without doubt.
However, there is a flipside. When you hold on to properties for, in some cases, decades, there are many things that happen. For one, when you look at homes that were built 30-40 years ago, they look, well – old. The technology of real estate advances and certain techniques become obsolete. Some properties have kitchens and rooms without the requisite infrastructure to accommodate more modern amenities. Other buildings might have been built without parking or with limited parking space. These lose their value over time.
When you go to sell a 30-year old property to a tenant, there is one basic question that everyone will ask you – how long will this structure stand? People have doubts about very old constructions, and sometimes for good reason. Seasonal battering and harsh environmental conditions take their toll on a structure, especially if it wasn’t properly built to withstand these pressures. Leaks, cracks and other problems might show up.
Also, since you’ve waited 30 years, you have to calculate the cost of maintaining the apartment over that duration when you conduct the final transaction. But most importantly, chances are, you might end up waiting too long, and have the peak value of the property pass you by. Situations in the real estate market change all the time, and they don’t always work in your favor.
• Myth #2 – Avoid taxes at all costs.
This is one thing that everyone tries to do. You hire a financial expert/consultant/genius and try, by hook or by crook, to get out of paying taxes. But guess what, in the long term, paying taxes can actually work out better for your bottom line.
Your savings depreciate in value over time, and if you’re saving for your retirement, consider this. Let us assume you have Rs 1 Lakh in the bank. Now, assuming that you won’t be getting out of paying a single rupee in tax money for your entire life, let’s take a look at how this works. If your savings depreciate in value by a few percentage points each year, would you rather pay taxes now, or wait a few years and then pay them when your money is worth less?
Do the math.
• Myth #3 – Your leverage isn’t how much you paid upfront for your property.
A lot of people confuse this term while calculating their gains. For all intents and purposes, leverage is simply – the cost required to acquire the property vs the overall gain that the property yields you. Simple.
So you can have a property that you purchased for a loan amount that you have to pay off at 6%. If this same property nets you 10% off your principal amount in gains yearly, you have positive leverage. It doesn’t matter how much of the amount you paid up front. You can pay half the amount of one-tenth of the amount up front, and still have positive leverage.
• Myth #4 – Flipping houses is not real-estate investing.
If you’re a flipper, you can create a lot of money for yourself over the short term. You go into a burgeoning area, buy a property and turn it over for a cool profit. But there’s a problem with this – you have no assets accrued over the long term. Consider if you held on to the burgeoning property for a longer time that flippers do and instead made it a long-term income asset. Wouldn’t that be better?
When you start to make money off flipping houses, your lifestyle naturally rises up in value. Now, to sustain this new lifestyle, you have to continue to make these high-value transactions. Until and unless you are actually directing the profits from your flipping towards a long-term, sustainable income source, you aren’t really investing.
So, how many of these myths have you been holding on to? And more importantly, how many are you going to dispel after you’ve read this?