Last month we wrote about 6 Reasons to Still Chose Property Investment Over Other Opportunities.

But in all fairness we can’t say that property investing is for everyone. There are a number of negative factors that existing investors will know and would-be investors should be aware of.

1. Leverage

Just as leverage can be a very positive factor for returns when prices are appreciating, it can also be a devastating factor when prices are going down.

With leverage, it does not take much of a fall in prices and your entire deposit can be erased.

For example, let’s say you bought a 1,000,000 CZK property with a 90% LTV mortgage. This means you have 100,000 CZK of equity that you have in this property.

A 10% decline in the property value with a 90% LTV mortgage means that your total deposit has been lost not just 10% of your equity as would be the case if you hadn’t leveraged the purchase.

Historically property prices have gone up so leverage has been a major advantage to the real estate investor. However, as the last recession has shown, this is not always the case and timing of the purchase and sale can be critical.

2. Transaction costs

Have you ever bought an equity or bond where the costs of the transaction were 6 to 8% of the asset value (typical transaction costs in Czech Republic) or worse yet, 9 to 11% (typical transaction costs in Austria)?

3. Illiquid nature

It is true that you can sell your property when required. However, it can take months to get the right price, especially in a down market.

4. Ongoing capital investment

With equities, bonds or commodities you purchase and then there is nothing more required in terms of capital investment.

Property, however, can need continual inputs of capital for things like negative cashflows or repairs, the latter which could be substantial in the case of an older property.

5. ‘Pain in the butt’ factor

Real estate investing can require the meeting of many legalities, especially at purchase or sale, which can consume large amounts of time.

It’s every owners worst nightmare – bad tenants. They can cause considerable damage to your property, refuse to pay rent and/or refuse to leave the property. Resolving the issue can take months to resolve and be very stressful for the landlord.

6. Size of the capital requirement / Lack of diversity

A large chunk of an investor’s capital can be tied up in one property. This greatly increases the risk of a loss in the case of a market downtown or other negative development which affects the property’s value (ie. a factory being built on the previously empty field next door).

7. Steep learning curve / Amount of skills needed

Owning a successful property investment has been likened to owning a business in that a number of skills are necessary in order for it to succeed.

A landlord needs to be knowledgeable on a number of levels (think mortgages, construction, titles, insurance, negotiations, market familiarity, income potential, appreciation potential, etc.) and have the ability to deal with a myriad of little oversights or difficulties that will inevitably be encountered.

A landlord also needs to make periodic business decisions related to the mortgages, repairs (ie. whether to replace or repair the faulty furnace), tenants (ie. where to advertise, how much to spend, how to qualify tenants, etc.) and negotiations (with tenants, banks, sellers, buyers, etc.).

8. Liability

You could never be personally liable if a company you owned shares in was sued in some affair but you sure could be if someone was injured, or worse, killed in a property you owned.

Property investment is definitely not for everyone. In fact, in this article we identified more negatives about it than we did in our article about the positives.

However, for those who are willing to make the plunge and put in the effort long-term, I personally think the chances of achieving your investment goals are much, much higher than through any other available investment mediums. Then again, I may be biased…

Nathan Brown www.czechpoint101.com