#1 – Supply & Demand
It’s very easy to get into an oversupply situation. With apartments developers can build hundreds at a time, so it doesn’t take too many blocks before you’re in an oversupply situation.
#2 – Times can change
If you’re buying off the plan or developing yourself – when you put the plans in motion or when you bought the market might have been good…. But by the time even though time you thought about building times were good. By the time they’re built and ready to sell time may not be so good. Unlike houses which sell quicker.
#3 Limited land component
Land is the component that appreciates in value –the building depreciates. It is mostly land that drives property prices. Think of the building like a car – it’s not really going up in value.
Here’s an example. You buy a brand new $600k apartment:
- Let’s say the land component is worth $150k
- Building component $350k
- And $100k is developers profit.
As time goes on the:
- $150k land component is increasing
- $350k building component is decreasing and
- The other $100 disappeared.
That makes your $600,000 apartment a tough one to sell a few years after purchase!