We want security for ourselves and our loved ones. The security of real estate investment is perceived by many people. This need for security comes from the instinct of preservation. We want to avoid risk, to protect ourselves so that nothing bad happens to us.
We are rational beings but also emotional at the same time. The decisions we make, first of all, emotionally, then rationally. They are emotionally reinforced. Why are we afraid of fire? Because we can burn ourselves. We can burn ourselves so badly that the function of a limb disappears and we remain lame, which means that we can no longer walk. The function of modern man: bipedal movement is eradicated. Most of the roles of a modern, civilized man are considerably reduced: he can no longer drive his children to school, he can no longer practice a sport, he no longer has so many fields of activity in which he can practice. All of these are rational consequences. Emotional functions can also be suppressed: they can no longer go out with friends, they can no longer start a family.
What can happen if you lose money? Let’s think about this position!
Yes, I know, it’s not exactly pleasant, but every time we think about what could be worse.
The thought of losing money makes us shiver. We feel a cold shiver down our spine, but if it still happens, what do you lose? Ask this question! You lose the opportunity to make some investments, you need to wait longer for a certain purchase, to achieve a certain goal. Maybe, emotionally, you think that you can’t start from scratch anymore. You are certainly disappointed in yourself and the situation itself, but what have you lost? Something that you can recover. It is important to recover psychologically and “restart the engines”.
Real estate investment security
Why is real estate investment the most sought-after investment? Because it provides security. Why does it provide security? Because such an investment, in addition to the property deed – a document based on which the right of ownership is established, involves several senses: sight, hearing, smell, taste, touch. The first time you can set foot in that investment; you “feel it”. You see it: you see how your investment looks and how it smells: you smell the paint, the freshness of the air. You hear how noisy the area where your investment is located is or how quiet it is. You can taste: you can taste a coffee in your home – in your investment or, effectively, you can also feel through this fifth sense what the elements within your property taste like. The fact that all the senses are involved in this investment, it gives, psychologically speaking, the highest degree of safety.
Financial investment
Financial investment involves a higher risk and, very often, a perception taken from the people that the investment is risky in terms of losing money. For people who do not have much knowledge in this area; this type of investment represents, for them, a risk of losing money. They are not given a win, since such an investment does not involve any sense after all.
Owning financial instruments and here I am referring only to the classic, traditional ones: bonds, shares and government securities does not involve any sense. Owning these instruments, respectively this investment, cannot be touched: only a deed, a sheet on which the conditions of ownership are written and the right of ownership is stipulated. It cannot be tasted, seen yes, only the deed, not the instrument that underlies the investment, can neither be tasted nor smelled: the ink smells the same on any paper whether it is a deed or not or whether it is a property deed
Real estate investment security vs. financial investment uncertainty
Psychological aspects
Real estate investment represents an asset that is at the base of Maslow’s pyramid: a roof over your head. Financial investment represents assets that are on higher levels within the pyramid of human needs, namely: independence, self-realization, self-esteem. I wrote more about financial needs here: https://www.psihologiabanilor.ro/obiectivele-financiare-din-viata-ta/
Real estate also represents an asset that you live in all your life; a real estate is known as a financial instrument such as: a share, a bond, a government bond. There is greater control over the management of a property, because if it is no longer a good investment option, you can exchange it (you know how because the importance is knowing the process) or you can leave a legacy. On the other hand, an exchange of shares or bonds requires selling it, you don’t know how and you need help and I ask this process is online, not physical: you don’t see the delivery of physical objects.
Financial aspects
A real estate investment represents its rental or sale. Profit is recorded over time, accumulating rent after rent once the investment has been made and is given for use or sale after the property has been purchased at a certain price, and the sale is made at a price higher than the purchase price. To make a big profit in the sale-purchase process, often the mechanism is to take it at a price below market: either you find an owner who is in a hurry to sell, for various reasons, or you take it without improvements to improve it/make certain changes to its style, furniture, so that it can be a property sold at a higher price. The percentage of the difference between the purchase and sale price represents the gross profit share. The net profit share is after taxes and duties are paid on that property.
The profit recorded in the rental process represents the monthly amount paid by the tenant. Here there are two options:
- The entire amount of rent goes to the owner and he practically amortizes his investment
- The amount paid by the tenant does not go to the owner in full because part of it goes to the bank, being a property on loan. Only the difference goes into the owner’s pocket and it represents the depreciation of the initial investment and then the profit.
Investment cost
Real estate investment requires a larger investment than financial investment
Financial investment does not require large amounts. A passive financial investment can be made with a minimum of 150 lei per month. The registered profit is called yield and what the investor receives in this case represents the amount with which he is in the plus. Here there is no depreciation.
Unlike real estate investment, the yield can be reinvested and generates capitalization. The capitalization effect was called the eighth wonder of the world by Einstein. This capitalization refers to the percentage of return received on the investment that is added to the account over the existing amount deposited and thus profit is received: interest on interest. This concept looks like that of the interest paid on the real estate loan. In 30 years, the amount doubles, but depending on the amount deposited and the percentage of return received, there is a period in which the profit exceeds the amount deposited and generates passive income. Passive income is the amount you receive without doing anything. It is obtained from investing and reinvesting your money.
To find out the period in which your money starts to produce as much as it lasts, the formula is applied: 72/ the percentage of return.
The amount deposited is very important, but so is the percentage of return received.
In investing you need money and time. If you don’t have time, you will compensate with money, if you have time but no money, then patience is necessary: over time, money will make more money for you, while you take care of other activities and responsibilities.
What is the perception of risk in financial investments and the safety of real estate investment?
The risk of investment, both real estate and financial, is to sell at a much lower price than the one at which the purchase was made. In both categories of investment, goods are purchased that are characterized by a selling price and a buying price.
A good investment decision is made at the time of purchase and at the time of sale. The difference between the two moments generates profit.
Being, in both cases, goods that are not sought after on the market. Real estate will be sought in university towns and companies will seek to borrow from investors, issuing both bonds and shares. State bonds represent the need to supplement the state budget.
Shares are the riskiest, but to reduce the risk of losing money and failing the company you have invested in: 1) invest in several companies and 2) invest in companies in consumer goods. If you invest in companies in consumer goods during times of crisis, people will not eliminate that product, say electricity, but will only economize on consumption, which will generate a decrease in profit, but not losses.
Psychology of financial personality
There are people focused on risk and there are people focused on safety. We are different and this is precisely the pleasure (otherwise we would be bored) and that is why there is such diversity on the market and not just in investments.
There are several categories of investments. You can reach the same point, the same destination with several vehicles. It depends on which one you like best and how long it will take you to get there; how much you are in a hurry. The same principle applies to investments. It is necessary to choose your path and to know the road conditions. The road conditions represent the way in which you, due to your way of being, accept to go with that vehicle or not. It is necessary to be aware and know all these aspects.
Calculations
What does a cash real estate investment entail?
Investment of 55,000 euros in a studio apartment, furniture: 6,000 euros, rent: 300 euros.
Yield: 5.90% gross.
Costs: The costs are represented by notarial deeds: 1,500 euros, furnishing: 2,000 euros/room = 6,000 euros, redevelopment/renovation after a period of time, 75% rental level.
Investment amortization period: 61,000: (300×12) = 16.9 years.
Taxes: 10% profit tax and another 10% CASS (if you exceed the average annual income of 12 gross minimum wages).
What does a real estate investment with credit entail?
Real estate investment with credit:55,000 euro studio; rent: 300 euro, down payment: 15% = 8,250 euro, documents: 1,500 euro, furniture: 2,000 euro/room = 6,000 euro
Yield:7.49% gross.
Costs:15% = 8,250 euro, documents: 1,500 euro, furniture: 2,000 euro/room = 6,000 euro
redevelopment/renovation after a period of time, 75% rental level.
5.50% loan interest
161 euro monthly installment for 30 years
Investment payback period: 30 years because it is on credit.
What does a financial investment entail?
Monthly allocation of 480 lei, or approximately 100 euros
Yield of 8% annually with capitalization.
Capitalization formula: 72/8 = 9 years. In 9 years, the income received from the investment begins to exceed the monthly allocation.
Investment duration: 30 years
Invested amount: 172,800 lei
Account value: 589,400 lei
I invite you, if you want to find out concrete data in your situation, to find out what you can do, what is the personalized solution depending on your income, but also depending on your financial personality, you can schedule a free session with me here: https://www.psihologiabanilor.ro/consultanta-financiara/
Success in becoming aware of money and the financial decisions you make to generate more money and achieve your goals!
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