Being a homeowner is a dream for all people across the globe. This makes investment in housing unexpectedly higher among the middle class. People from this class rarely invest in stock markets. It’s hard to find people who own real estate buying it outright. Most of them take out loans to fund their purchase.
This decision has a very huge impact on their lives. These people end up becoming “house poor” meaning they do not a decent amount of capital. Instead, they owe most of their money to banks and make mortgage payments now and then forcing them to lead a poor lifestyle.
The youth are slowly discovering that the real estate dream may not be worthwhile and instead they choose to spend their money and time on traveling and education. Below are some reasons why buying a house is no longer an investment.
This means that the listed prices are different from the rates at which transactions take place. It is very hard for a buyer to know the right buying price unlike in the case of bonds, stocks, and other securities where you find the listed prices are similar to the transaction prices. Real estate is known for buyers and sellers being conned by middlemen if they are not very careful.
Low Returns And High Expenses
Real estate investment is known for providing low returns. For a long time, the returns from this investment have been significantly less than the rate of inflation. The rentals earned are also negligible. Also, before you start earning rent, you will have to put in a lot of money, time, and effort.
There is also an element of risk since it is normally hard to rent out houses. The bottom line is, the returns you get from real estate can be compared to risk-free investment even if you will have to take a lot of risks. This is what renders this investment a bad bet for the middle class.
What makes investments useful is the fact that they can be sold promptly in times of need. For instance, in the case of stocks and bonds, they have a ready market where they are exchanged for cash in matter of minutes. This is the same case for silver and gold investment. Real estate hence becomes the only illiquid investment held by middle class people.
Selling real estate is hard in all markets. It becomes difficult to a point where sellers have to wait for even six months to an year before they can get cash in lieu of their property. Therefore, it is not advisable for the middle class to put in a huge amount of their capital in real estate where they cannot cash it easily.
Since real estate cannot be bought and sold too often, it forces a person to settle in one geographical area. The challenge with settling in one area is that opportunities are very limited. In this era of job changes and layoffs owning a house has become more of a liability than an asset.
The real estate investment has an overwhelmingly high cost of transaction. First, every time a sale takes place, the government takes a huge chunk of money. There is also costs such as brokerage, appraisal costs and legal fees which are involved in every real estate transaction.
Therefore, every time a transaction takes place about 10% of the value gets lost to transaction costs. This contributes to the illiquidity mentioned above. The point remains that since these transactions costs are very high, buyers are left stuck with their property even if they want to sell it immediately.