It is well documented, that purchasing a house or a condo is a major contribution to building wealth. It’s a large and serious investment that requires commitment over a long period of time (typically anywhere between 10-30 years), and one which offers several benefits, financially and personally. For most people this is also what they would consider a “safe” investment which they feel comfortable with.
Phrases like “real estate never looses value”, or “when all things go down, I will still have my property” are pretty common, especially when it comes to discussions about whether you should invest in real estate, or in stocks.
It’s more complicated than that
I have diversified my investments across several segments, including real estate. However I have not purchased a house or condo. I have bought land. 1,2 ha of agricultural land, and another 0,54 ha of land that is destined for future housing. The agricultural land is currently being leased out to a neighbor of my parents, with a very simple arrangement that doesn’t really provide me any money, but instead supports my parents with agricultural goods for daily use (think of potatoes, lettuce, cucumbers, onions, etc.), and it covers any involved taxes for that land. The other 0,54 ha I bought 6 years ago on an auction. It’s a piece of land right across the land of my parents, and I bought it with the idea of building a vacation home out there.
After a couple of years I realized that this vacation home will never happen, so I decided to evaluate the market and to see if I can sell that land. Lucky enough, prices have increased greatly and I expect to come out of this investment with a good deal.
What largely contributed to the price increase is the great location of the village, the diversified and international folks there (we got people from Poland, Germany, Switzerland, France, and Italy) and the fact that people who live there care about their properties and their houses, contributing to a good look and comfortable atmosphere of the entire village. The next small town is only 5 km away, the next larger city only 30 km, and if you want to go international: It’s only some 120 km to Berlin in Germany. Great for a weekend trip.
All this contributes greatly to the location, but there are tons of other examples where things can go very wrong. Mismanagement of land, houses and condos can significantly contribute to a depreciation in value. Having the “wrong” neighbors can diminish the reputation of the location and drive prices down, rather than up. And building “on-the-cheap” can create early deterioration of look and shape of a house or condo, requiring additional investments not only from yourself, but also from all those around you in order for a location to gain value.
When things go wrong, real estate can turn out to be not the dream package that your parents were always talking about. There are several and significant risks involved, which are largely out of your control. Putting money into a piece of land, a house, or a condo, is surely not risk-free and real estate doesn’t always gain in value.
Do your research
Similarly with stocks, you need to do some research before you put money into this sector. Check and evaluate the location, visit the place, say hello to some neighbors. If it’s a country-side village, take a look at the condition of other houses nearby, the roads, bridges, public transport, water supply and electricity. Where is the next restaurant? How are small businesses doing there? Is it a family or a single place? Is there a school? A church? Wha’ts the median age of the population, and where is the next doctor or hospital?
Tick off some of these boxes, do the due diligence, and see your odds of putting your money into the right place increasing dramatically. Of course there is still no guarantee, but there never is. After all, it’s all not about guaranteeing anything, but only about increasing the odds to do the right thing.
Oh, and don’t get into the discussion whether stocks or real estate is better. It’s pointless. If you can, just do both.