Rules to help assets not turn into liabilities when investing in real estate

Having held the position of manager, marketing director, and sales lecturer for real estate and consumer goods businesses in Ho Chi Minh City for 10 years, Mr. Tran Minh Quang said that many people pour all their money into real estate but still confuse assets and liabilities when making investment decisions.

This confusion leads to low investment efficiency, even loss, having to sell off to cut losses, which means turning a real estate asset into a liability. Mr. Quang shares 4 simple rules to distinguish and prevent real estate from becoming a depreciating commodity and causing financial loss to investors.

Rule 1:Real estate that generates money is called an asset.

This is the step to clarify the concept of assets and liabilities. Assets are the result of investments that generate income, increase in value or make a specific profit. Liabilities are items that continuously take money out of your pocket without generating any money, even depreciating, having a deficit, or making a loss. The mentality that real estate is always an asset is not always correct. There are many situations where it seems like you are investing in an asset but in fact it is a liability.

For example, buying a piece of land, waiting for the land price to increase, selling it for profit, this is a successful asset investment. Meanwhile, investing in a large asset such as a serviced apartment (fully furnished with high-end furniture) for rent but having no customers for a long time, having to cover monthly operating losses, selling it at a loss on furniture... is a typical example of a negative asset investment.

Rule 2:Real estate invested with own capital creates more secure assets

This means that assets or liabilities depend largely on the source of investment cash flow. Real estate investment with borrowed capital has a higher rate of becoming liabilities.

For example, with real estate, if you invest with your own capital, also known as equity, and reasonably calculate the cash flow period, when this asset is exploited (leased) or sold at a good price, then this is a valuable asset.

Meanwhile, real estate investment uses too much borrowed capital, having one dong but wanting to invest in an asset worth 10 dong, meaning borrowing 9 dong, and then having to work hard to pay interest, this is an unstable investment rate, with a tendency to turn into a negative asset because financial costs eat into the principal.

The formula of assets equals equity plus debt is often applied in the field of finance and accounting. But in reality, if the debt ratio is too high, the risk of this asset becoming a liability is very high because it can lead to a scenario of death on the pile of assets (debt collection, debt collection).

Rule 3:Real estate put into operation, high liquidity is the asset

This means that abandoned real estate, which cannot be exploited, is easy to buy but difficult to sell... is a negative investment rate.

For example, buying a completed apartment for rent to generate monthly cash flow is considered an asset investment. Meanwhile, buying a whole floor of apartments under construction with the intention of reselling for profit but market liquidity is declining, having to hold the goods for a long time, this is a type of negative investment.

Rule 4:Real estate with complete legal documents is property.

On the contrary, real estate disputes, legal procedures take a long time to complete or cannot be completed according to legal regulations, then there is a 90% chance that this is a negative investment (loss, loss of money).

For example, buying a plot of land with a land use right certificate and residential land (used to build a house) is a valuable asset because it can increase in value over time or is easy to trade on the market. Meanwhile, spending billions to mistakenly buy a plot of land that is stuck in planning, does not have a certificate, or is entirely agricultural land that cannot be converted to residential land is a negative investment, with a very high possibility of loss.

Mr. Quang added that in real estate investment, there are many variables that affect the value of assets (causing real estate to increase sharply or plummet in a short period of time). These are changes in real estate legal policies, adjustments in credit policies, excess supply affecting demand and of course, fluctuations in the economy.

Therefore, to avoid real estate investment from becoming a liability, real estate market participants must continuously monitor the general developments of the economy and the real estate industry in particular to have flexible adjustments to their business strategies to limit risks.