There are 2 types of buyers of real estate; end-users and investors. An end-user needs a property to fulfil one of his two basic and permanent human needs; “food & shelter” therefore, he buys property whenever one of his needs arises. When focusing on investors, there are two key questions to answer?
1- What are you waiting for?
2- What are your other options?
Let us start with Question 1. What are you waiting for? Do you have any idea what is going to happen tomorrow? In the medium term? In the long term?
Most investors depend on one of the following 2 factors
– Past performance.
That is absolutely unwise in my opinion. For example, If you buy a rented apartment that has generated a net ROI of 10 %, this in no way means that the minute you buy it will generate the same ROI. Actually, the tenant might leave any minute and you might be left with a negative ROI, no income and an annual property management fee to pay. Likewise, if you buy a plot of land at BD 20 per sqft based on the fact that it was BD 18 per sqft a year ago and appreciated by 11.11% over 12 months, this past growth does not provide any guarantee, nor any indication towards what will happen after you buy the plot. Growth does not duplicate itself systematically.
– Professional advice from the so-called “experts”.
Back in my early days in business, I learnt that a true investment professional never gives advice, he gives information and educates only. No expert can predict what is going to happen even tomorrow. Lots of variables can change the game. The world is full of uncertainties. Then what are you waiting for? Moving on to Question 2. What are your other options currently? There are three uses of money:
– Spend it.
Convert it into goods or services intended for consumption.
– Save it.
Place it as cash in any of the “liquid” instruments.
– Invest it.
Convert cash into a different unit, equity or commodity in the hope of reconverting it back into cash at a higher value. The best definition of saving is “deferred spending”. Saving money is not meant as a hobby in itself, such as collecting stamps – even though a few do that. Money is saved to be spent in the future.
The biggest concern here is that if the inflation, which means the increase in the cost of buying things – is higher than the returns of interest on your savings account then you are losing the actual purchasing value of your saved money. For example, if you save BD 1,000 that is 50 notes of BD 20 on 1st January and earn an interest of 2 % per annum, the paper value of your money will increase on 31st December and you will have 51 notes of BD 20, which is BD 1,020 but, this is very much misleading as your BD 1,020 buys you less than your BD 1,000 12 months earlier simply because inflation was at 6% therefore, the real value of your savings has dwindled. In the 1980s it was profitable to save at banks as the interest rates were above 12 % p.a. and the inflation was well below. But, nowadays, in every savings account, there is a “rat” that gnaws at the value of your savings. The size of this rat varies from one account to another, sometimes it becomes a nutria.
Now let us take a practical example. You and your brother have BD 32,000 each and you decided to invest and your brother, being scared and having a low-risk tolerance decided to save his money in his bank. You decided to buy a small, vacant studio in a new building.
• At the end of the first year and despite all the efforts you could not get a tenant and to make it worse you had to pay BD 270 as an annual service charge. Your brother reprimanded you for your “ignorance” as his money grew by 2 % and his bank statement showed BD 32,640.
• At the end of year 2, your studio remained vacant and yet again you had to pay the service charge which means your BD 32,000 investment shrank by BD 540, equivalent to 1.68% less whereas your brother made another 2% cumulative interest ending up with BD 33,292.800. What a silly decision buying this studio proved to be, then.
• Eventually, after 2 long years, your flat got rented for only BD 250 gross, minus EWA and internet you ended up with an average of BD 220 per month thus, a total of BD 2,640 and after paying the 1-month brokerage fee and the annual service charge you ended up with BD 2,120 net in your pocket.
Now, let us do the math at the end of the third year:
• You: 32,000 – 270 – 270 + 2,120 = BD 33,580
• Your brother: after 3 years he had BD 33,958
Let us see what happens after the 4th year bearing in mind that the flat was vacant for 2 full years on the one hand and that the bank interest rate at these small amounts was 2 % which is higher than what banks currently offer.
• Your net earnings are BD 2,370 total of BD 35,950
• Your brother’s new earnings are BD 679, a total of BD 34,637
Shall I continue to calculate the end of year 5?
• The worst scenario of real estate investment is much better than saving your money.
• When you buy real estate you own an asset that is not perishable, that will never be outdated and that generates passive income
• The best time to buy real estate is always NOW whatever the offer. The main argument here is that the alternatives are not as secure and as reliable in the medium to long term.
This article was published as part of the eighth edition of Property Finder Bahrain’s Trends Report.