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Property mini-series part 2: Cons of real estate investing

June 16, 2024
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FinMeUp
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FinMeUp

In this mini-series, well discuss the ins and outs of real estate investment.

 

Managing time/fees

It takes time to manage properties. You can either take up this responsibility yourself, or you can pay agents to manage your portfolio on your behalf. 

If you choose to manage your portfolio yourself, you need to learn skills like determining fair market rent, negotiating a lease agreement, performing routine maintenance and repairs, conducting inspections, and following housing and landlord-tenant laws. As any owner will tell you you have to keep your finger on the pulse all the time.

These responsibilities can be daunting, especially if real estate is not your 9-5. The alternative is to hire a local professional property manager. The problem here is that it can be pricy and the managing agent doesnt always have your best interest at heart. 

Maintenance costs

There may be times when unexpected maintenance issues arise, such as a failed water heater or a leaky roof. The associated repair or replacement costs may be substantial and could wipe out your cash reserves. I suggest always keeping a cash reserve for maintenance and vacancy purposes. Maintenance should not be an unexpected expense. If you plan for it, youll be better equipped to internalise and absorb the cost.

Problematic Tenants

Tenants can be a headache. Your cash flow can take a significant hit if you end up renting to a tenant who doesn't pay, leaves the property in very poor condition when they move out, or both.

Unfortunately, the law is very tenant-friendly,, which means youre always going to struggle to get them evicted and may even face court cases if they sue you. And when eventually do evict, you'll likely have to shell out money to repair the damage your unhappy tenant did to your property.

Quality tenants are worth their weight in gold because they tend to stay long-term and take pride in your property as if it were their own, but they can be hard to come by.

Risk of vacancy

Real estate is seen as a low-medium risk investment. Whilst that is true, it only applies to investors who have enough money/reserves to absorb rental losses. For example, if you buy an apartment of roughly R600 000, the monthly payment on a 20-year loan at 10% equals R5800 per month. Of course, the monthly rental income will mostly offset this amount, but what if your tenant doesnt pay, or you cant get new tenants after your old tenants moved out? Thats R5800 directly from your pocket. If your apartment stays vacant for another month or two, losses may be very tough to absorb.  

Illiquid Investment

It takes time to sell a property. Therefore, real estate should always be bought with a longer-term strategy in mind. Know what you own - you're buying a tangible asset that you can't quickly liquidate for cash. 

Transaction Costs are High

The transaction costs associated with buying and selling properties can be quite steep. These costs include commissions, title insurance, loan origination fees, legal fees, and a variety of closing costs. These costs will be discussed in detail later in the series. 

Summary

Real estate investment does come with significant risks. It is essential that you buy a property that you can cover when things dont go to plan. Overleverage is the most common pitfall that brings down real estate investors. You need to be able to make monthly payments on your debt despite market dips, tenant problems, property vacancies, unexpected repairs, maintenance costs, and other expenses that are part of doing business when investing in real estate.

 


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