I often hear people say, “Buy land as you can never lose money”. There was this believe the world over that property prices will always appreciate and one could hardly lose money investing in property. This is the reasoning that caused the subprime mortgage crises of 2008, which virtually brought down the world’s financial system with its effects still felt today. The banks doled out credit indiscriminately for mortgages and subsequently developed derivatives from these mortgages which were widely traded in the financial markets. Everyone threw caution out of the window as the underlying asset was real estate which was considered safe.

Investment in Property is safer than that of the Capital market but this in no way makes it risk free. Every investment class has its own risks and return dynamics. The lower the risks, the lower the returns and vice versa. Contrary to what is being peddled by some real estate promoters, you could lose money investing in real estate through these mistakes which you should guide against.

– Having no Plan or Strategy: Why are you buying the property in the first place? Is it for rental or for owner occupier purposes? Is there some valuable information you have which could make the area very valuable in a short while? How much is your expected return on investment? These questions are not exhaustive but having a plan generally for any investment decision enables you navigate through the twists and turns effectively. Without a plan, you are planning to fail which could costs you a lot of money.

– Over-Leveraging: The more the leverage used, the more the risk and you should never borrow more than you can comfortably repay. In obtaining a mortgage or financing to pay for that dream house or property, the bank will usually require you to make some contribution or down payment before providing financing for balance. The loan repayment will be structured into monthly instalments for several years and a default on payment for 90 days could result in a foreclosure. Once foreclosed your property will be sold at auction and you could lose all the equity you have built up in the investment.

– Poor Location decision: Location is very key in property investment. Not many people for example would want to buy a property near a major poultry farm no matter how cheap the offer. Also most rich and affluent people would also never buy a well built and classy property in a ghetto due to the security risks of living in such an environment. Buying a good property in a bad location could result in losses as you may be unable to sell when you want to.

– Underestimating timelines and costs: It is usually advisable for would be property investors to have at least five years investment horizon in mind as it takes time for property prices to appreciate though exceptional cases do exist. It also takes time to sell property even when the price has appreciated as this asset class is not liquid. Also every time a property is bought or sold, there are some transactional costs on both the buyer and the seller side which when factored in could involve a lot of money. Selling too soon may result in distress prices which may be unable to cover the initial cost of investment.

– Buying at the top of market: You make money from any asset by buying low and selling high, the real estate market inclusive. People buy properties at any price the seller is willing to sell without doing their own home work to determine if they are buying at a fair value. Reality only sets in when trying to sell as the investor may be unable to get a reasonable bargain having initially overpaid for the property. This is usually most evident at the high end property market as their prices tend to rise and fall with the economic realities of the day. It is advisable to always make use of the services of a professional to assist in realistic valuations especially if you have little knowledge of the property market.

– Poor Due Diligence: It is common sense that we should always carry out due diligence before buying any thing. This will enable you uncover if the property in question is currently encumbered or if there are other risks which the seller would never tell you. Even when the price is ridiculously low, we should tread cautiously and be willing to make use of the services of professionals to advise us accordingly. Never buy a property without seeing it or someone you trust his or her judgment seeing it. Lack of due diligence could result in fraudulent sale and total loss of investment.

– Not Monitoring your Investment: There are associated risks with every investment and an investor who wants to succeed should be actively involved in managing and mitigating these risks. For example, the boom in property investment is directly linked to the economy of the area where it is located. If the economy is growing fast, then property prices will naturally appreciate and vice versa. The closure of a major industry which was the mainstay of the market would result in loss of employment and income to households which would affect property prices and market. For a property investor it could mean time to exit as failure to do so on time could result in significant losses. Investment in property over the long term is usually profitable but this doesn’t take away the reality that losses can and do occur. Is it possible to lose money investing in the real estate / property market? YES.

Wisdom speaking