Well, I can lose money
Investing in real estate offers the chance to make money through smart decisions and good timing. But there are always two sides to every story. Money can be lost almost as easily as it can be made.
In his book entitled The Black Swan, author Nassim Taleb discusses the concept of losing money. He begins with a simple, yet memorable quote: “Well, I can lose money.” This quote is applicable to several facets of our daily lives, especially where some form of risk is involved.
Taleb goes on to say that “this phrase is not informational unless you can attach a quantity to that loss.” This is true, as it is often difficult to predict how well your investments may fare in the future. If you invest in or own a company, there is a chance that it could be out of business as little as a year from now.
Real estate is an entirely different investment vehicle. In fact, some people prefer it over other types of investments because, unlike stocks or bonds, it is a tangible object. It is, however, not immune to generating losses for those who invest in it. Even if you focus on an up-and-coming area with a strong demographic, you might operate it at a loss for a while before turning profits on your holdings. Sometimes a real estate investor underestimates the costs of renovations, or the time it takes to find tenants thus not meeting the cash flow objectives set.
Elements such as inflation and price asset depreciation can cause other losses for buyers. But if they maintain and manage their assets properly over the holding period, the properties will eventually appreciate in value.
Maintenance and management are crucial parts of the ownership process, as is dealing with tenants and collecting rent. If a property is well-kept, it will be more likely to attract tenants, thus allowing the owner to generate cash flow, and with time obtain the capital appreciation.