During meetings with some people, I frequently heard the assertion that real estate or property is the sole lucrative avenue for long-term wealth creation. If you subscribe to this notion, it is likely that you aren’t aligning with some of the more astute investors on the planet. It doesn’t matter whether you are a virgin or not.
I acknowledge that property has proven to be a lucrative investment for some people. I know it is especially comforting to be able to go and touch your investment and see that it is real and not just random pieces of paper.
However, it is essential to exercise caution and take additional measures to avoid overcommitting to the property market in any market cycles. Property markets can be subject to fluctuations, affected by economic conditions, interest rates, and other external factors.
Last month, Bank of America’s fund manager survey found global allocations to real estate investment trusts are at their lowest level since 2008, despite a marked improvement in sentiment on the outlook for the economy. In many parts of the world, higher interest rates are only exacerbating pre-existing challenges.
Property is a relatively illiquid asset. Selling a property can take time, and the process may be more complicated than selling other types of investments. High levels of leverage can amplify financial risks, especially during economic downturns. I have met some wealthy people who are stuck in challenging situations with property-related debts.
Debt can be sexy because you are leveraging the money to buy a bigger asset, which if it grows, you can make more money. On the other hand, if the property goes into a downturn or gets stuck in the mud, you can lose money as well and you have got this debt that you need to service. If you don’t have high enough rent or if your property is vacant for a period of time, that can put a lot of pressure on you.
There is always the case that the property market may go down. There is always the case that it just may stagnate and not grow at all. There is always the case that you could overpay for a property. Even though it does grow, it’s not catching up to what you actually paid for it. Sometimes there is a very large discrepancy between what the property guru is saying and what the property offers. You know what I mean.
Come on! Nobody has a crystal ball and can’t predict the future with 100% accuracy. Avoid putting all your financial resources into property. Don’t be a hero and take large bets in property. Given the exponential speed with which the global economy and markets is evolving, the essence of diversification is choosing assets that are not perfectly correlated with each other and that’s what matters to me.