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Top Mistakes And Lessons In Real Estate Investment

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Read Time: 7 mins

Real estate has been widely considered as one of the most lucrative investments in Pakistan. If you’ve invested in real estate and you’re not making an annual profit of at least 10%, it means your success in investment is not up to the mark. Since investment comes with risk, if you’re failing to make an expected profit by 10 or 20 percent, it’s acceptable. But if you’re constantly failing to achieve the desired profit, it means you have to revisit your strategy for real estate investment. To learn the art of investing in real estate, you must analyze your mistakes and evaluate the reasons for failure thoroughly. As we know “Mistakes are the biggest teachers in life”, today we are going to explain some of the major mistakes real estate investors usually commit which eventually results as failed investments or less profitable than expected.

1. Do not always go with the flow

Do not choose your next investment destination just because it’s the talk in the town these days. This means you should not rush towards any project because of the brouhaha. There’s a fair chance that by the time you hear about it, the prices have already increased. Following the patterns of human psychology, you may be trapped by the false sense of security about your investment because you see many people investing there. But the fact is only a few of them will actually make a profit out of it and rest will end up losing their hard-earned money.

Therefore, we suggest that no matter how much people seem confident about any investment, you must do your own homework and research before making a real estate investment.

2. Consulting agents instead of Consultants

One of the biggest mistakes people make before investing in real estate is that they failed to differentiate between a real estate agent and a real estate consultant. Both of them are two different categories with different roles. You need to understand their respective roles before working with them. A real estate consultant can guide you to invest in the right place at the right time. But you cannot expect the same from a real estate agent. He can lack the experience to guide you about this.

Real estate agents will never say ‘NO’ to you, unlike the consultant who will tell you to wait for the right opportunity. The consultants usually charge a fee for advice but their income is free from the greed of commission. This means they will guide you whatever is right for you without any conflict of interest. But this is not the case with real estate agents. Real estate agents always tell to sell if you own or always ask to buy if you don’t own, because he will charge his commission either you sell or purchase.

3. Paying attention to every news

Many people are eager to know instantly about what’s happening in the market. Paying too much attention to every update from the market is not a recommended strategy. This can lead you towards short-term thinking and over-reaction which will eventually affect your long term gains for little quick benefits.  If you sit and analyze each event and assess its impacts on your portfolio, you will get confused. You are bombarded with tons of news and updates from the real estate sector which has no significance and impact on your portfolio. If you’re not a short term investor, you should not pay attention to all little updates and information.

Sometimes agents and Developers spread fake news and rumors for their own benefit. So, we recommend you keep yourself away from such distractions and everyday updates, be confident in your long terms goals and trust your research.

4. Panicked by market

Many investors got panicked if the prices go down due to uncertain market situations. This is their second mistake after purchasing the property at a higher price. You should purchase it in the price you’re selling it during the downfall of the market.

Please, keep in mind, you’ve not incurred a loss if you retained your property. This means you incurred loss exactly when you sell your property at a lower price. The same goes for profit. Profit only comes when you sell the property at higher rates.

Usually, investors got stuck in this position when they failed to cover the downside analysis against their investment. Selling it at a lower price than your purchased price clearly indicates that you’ve miscalculated the bottom, and now you’re selling your property at the bottom. We know that estimating the exact peak or bottom is nearly impossible, but it’s good to go as long as you within 20% of your purchased value.

5. Investing Long term

Most of the investors believe that holding property for a long span of time will surely give them good returns. Many people invest in the long-term with this hope but in the end, they fail to achieve their desired results. There are many projects which have very weak perspective in terms of long-term investment such as DHA Multan & Gujranwala. 

Although we have good examples of lucrative long-term investments, they are rare. The majority ends up making hardly 3 to 4 percent annual profit. You can consider a long-term investment in areas like Gawadar, but make sure you invest a little amount of your portfolio for such long-term investments.

Therefore, we recommend you opt for a medium span such as 1 to 3 years and take the exit at a good percentage. Moreover, if you’re convinced of long-term investment, we suggest you go for rental generating commercial real estate instead of residential real estate.

6. Naively investing in files

Our many investors are influenced by the false perception that investing too much in files will give them great returns. This strategy might be true in the past up to an extent, but it’s not lucrative anymore. Investing blindly in files has become a sort of gambling now. We’ve many examples of people losing their money after extensively investing in files such as in DHA Multan and DHA Lahore. You can also check Bahria Town, where people are allotted more files than the available land.

We don’t think it’s a smart move to invest millions for a piece of the document without any guarantee of good location and commitment regarding timelines of different phases. The chance of success is 50-50. Additionally, files are already that much expensive that even after all calculations, the fate of your investment will mostly depend on your luck.

You should only go for investment in files if you’re able to purchase it at a considerably lower price and that too in bulk quantity.

7. Lack of diversification

Many people invest their life-time savings in real estate. One of the major mistakes such people make is that they invest all of their amount in a single project. This makes the chances of success of their investment bond to a single project. Considering the different factors such as misreading of the market, incorrect calculations, failure of developers in meeting deadlines can make these investments hanging for a longer period of time.

If your portfolio is solely focusing on any single project or any specific developer, there’s a higher risk of failure. Therefore, we recommend you to make your investment diversified. Do not invest in any single project or with any specific developer more than 30 to 35 percent of your total portfolio.

Diversification is difficult these days until you have huge capital, but if you have a handsome amount you should never overlook this factor. With a diversified investment strategy, you will not only minimize the risk factor but also increase the chances of higher profits in real estate.

8. Over diversification

As we talk about diversification in investment, you must not over diversified your investment. Many people tend to invest everywhere in order to keep risk minimum. Another thought behind investing in multiple projects is that in case they incurred losses in any project, it will be covered by profit in another project. However, the profit gained after losing money in another project is actually compensation, not profit. To be a successful investor, you must have a win-win situation at least 75% of your investment.

9. An imbalance portfolio

There are many people who sell their property in less than market value due to any emergency situation. Nobody plan for this, but a part of your portfolio should be treated as a safety deposit and it should be conveniently cashable.

That’s why you have to maintain the right balance of the real estate to earn capital gains, liquidity, and rental income. You should focus on financial security in real estate so that you can persevere in difficult times.

Balancing portfolio mainly depends on different factors like age, financial standing, risk percentage, etc. Always seek reliable consultants who can advise you specifically as per your situation. For example. if you’re on the verge of retiring from your service, and you have a lot of plots in the portfolio and no rental generating property, you are in trouble.

10. Indiscipline and lack of patience

It’s not necessary that your investment follows the exact path as you analyzed before finalizing the deal. Real estate can be very unpredictable. There’s a fair chance that you made the correct analysis but certain external factors drive the market elsewhere. The moment you realize things are not going your way and market are performing against your expectation, this is the moment you become panic and takes the wrong decision. There are many people who sold their properties at low prices due to panic and a few months later, the market started to boom. This is the prime example of how a lack of patience can harm you when it comes to real estate investment.

You need to focus on your plan and never get emotionally unstable. Never let the external factors shaken your confidence. Stay calm and believe in your analysis.

11. Don’t wait for bottom or peak

This is a general practice in real estate that investors try to buy when the prices are at the bottom and sell when prices are at a peak. People tend to wait to hit the peak despite their property is already performing well. This is a very relevant decision in terms of real estate investment.

Since the real estate market is very volatile. You can never predict what will be going to happen the next day. The prices in the market change rapidly. Therefore, we recommend you to do not wait till the peak to sell your property as long as you are getting a good profit. Similarly, for buyers, you should not wait for the market to hit the bottom, purchase as long as you are getting a good deal.

There are many examples where people lost great entry and exit points while trying to catch the bottom or peak.