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Should I Invest in Real Estate?

by Brandon Turner on July 5, 2014 · 10 comments

  
Post image for Should I Invest in Real Estate?

Real estate investing is not for the faint of heart.

The television shows make real estate investing appear glamorous and thousands of books have been written on the topic all showcasing how awesome investing in real estate can be. However, although I believe anyone can invest in real estate, I don’t believe everyone should invest in real estate.

This post is going to explore this topic and help you decide if real estate investing is right for you.

Let’s Get on The Same Page About Real Estate Investing

First, I think we need to set some ground rules for this discussion.  When you hear the words “real estate investing,” what pops into your mind?

Some think of “house flipping,” likely because of the television shows where investors rehab a home and make an incredible profit. Others think of “landlording” and dealing with the hassle of tenants. Others think of investing in real estate like the stock market, through REITs or through Crowdfunding.  This is perhaps one of the most confusing aspects of the real estate investing world: the blurred line between the business or real estate vs. the investment of real estate.

You see, real estate can produce a profit through active means or it can produce a profit through passive means.  In my recent article, “Is Real Estate a Good Investment?” I used the following photo to explain this concept. Every niche and strategy falls on a different location on the “scale of passivity.”

Many people tend to write off real estate investing because they “don’t want to fix toilets” or they “don’t want to deal with tenants” but I would encourage people to re-frame the question and think of it in a new light. Don’t ask yourself “should I invest in real estate” but reframe the concept “will any of the real estate investing niches or strategies get me closer to my goals?”

For me, the answer is a resounding “yes!” but let’s dive in a little deeper and see how it looks for you.

What Are Your Goals?

What do you want out of life?

If you make an incredible income, love your job, and want to continue living the way you are forever… then perhaps real estate is not right for you. After all, real estate investing – no matter where it falls on the scale of passivity – is never completely painless. It does take work – even if that work is just mental. So if you don’t want to improve, why get into real estate?

However, if you envision your future as something better than what you currently have, real estate investing can help. (Tweet This!)

Now true – real estate is not the only way to build wealth. In my tongue-in-cheek article “How to Get Rich” I explore 7 different ways a person could build wealth, from starting a business to using the stock market to good old fashioned “savin’ yer money!”   In fact, given enough time, anyone can build serious wealth by just setting aside 20% of their paycheck and investing in low-risk mutual funds or stocks. Just ask Dave Ramsey.

However, my goal is not to retire in thirty years. Anyone can do that.  My goal is to become financially free soon- to begin living a life defined not by a boss or by a job or financial constraint – but a life defined by choices; my choices.

Furthermore, real estate gives me the opportunity to build that financial freedom through multiple avenues. For example, for years I lived off the cash flow from my investments, but at the same time I allowed appreciation and the monthly loan pay-down to help my wealth grow while I sleep.

And then there’s leverage. When I invest in real estate, I am able to use other people’s money (partners, banks, etc) to finance the deals, enabling me to buy even more than I could if I didn’t have that leverage. $10,000 won’t just get me a $10,000 property… it could get me a $100,000 property or more. However, keep in mind that leverage works both ways – and if things go bad, they can go bad fast.

I firmly believe that investing in real estate is the fastest, most assured way to build wealth. Therefore, it fits my goals perfectly: fast, secure wealth building.

Does that resonate with you?

The Pros and Cons of Real Estate

For some people, making a list of Pros and Cons helps when weighing a decision, so let’s do that now. As I said earlier, there are a LOT of different ways to invest in real estate, so i’m going to be generalizing here, but I think you’ll get the idea.

Pros:

  • Ability to build wealth faster than by simply saving money
  • Make money while you sleep
  • Have an incredible degree of control over your investments
  • Have a hedge against inflation
  • A variety of different niches and strategies you can engage in
  • The ability to force appreciation through rehabs
  • Housing will ALWAYS be needed
  • History has always shown real estate to be a good investment long term
  • You can negotiate or find great deals – below market value
  • You can use a small amount of cash to buy a large investment (leverage)
  • You have BiggerPockets to help you every step of the way

Cons:

  • Dealing with tenants can be difficult
  • Dealing with contractors can be difficult
  • Vacancies can cause a loss of cash flow
  • Increased stress when things go wrong
  • Increased leverage causes increased risk
  • The more property you invest in, the greater the chance of being sued
  • The paperwork can be excessive
  • Putting all your eggs in one basket can be risky
  • If you screw up, you can lose a lot of money

I’m sure there a LOT more Pros and Cons we could add to this list (and hopefully you can add some in the comments below.) The fact is: there is no “perfect investment.” I personally believe the pros outweigh the cons any day, but perhaps for you that isn’t the same.

Let’s move on and look at one of the most important factors to consider before investing in real estate: your personality.

Related: 12 Things I HATE About Landlording (with Gifs!)

Let’s Talk About Your Personality…

Some people just can’t handle investing in real estate; it’s not a bad thing – it’s a personality thing. Let me explain.

If you are easily overwhelmed with stress, don’t have the patience to deal with drama, can’t think creatively if your life depended on it: real estate might not be a good choice; real estate can be tough and require these skills. Obviously there are ways to mitigate this, like using a property manager or investing in REITS or crowdfunded deals, but no matter what you choose: real estate investing and drama tend to go together like my wife and Starbucks; they are inseparable.

Furthermore, real estate investing requires the desire to learn and get creative sometimes. Unlike stocks or mutual funds, you can’t easily give your money to a manager to handle everything for you. You MUST do your homework, and this required learning. Yes, you may have to read a book or ten, you may need to read a blog post or a hundred, you may need to attend a local networking event with other investors. The point is: a great real estate investor never stops learning! (Tweet That Quote!)

Finally, real estate investing requires some risk, so your personality must allow for that. If you are deathly afraid of losing your money or messing up… maybe real estate is not for you. So… how afraid of risk are you?

Before jumping into real estate, take an honest evaluation of your personality.  Are you prepared for the risk, for the stress, for the homework, for the hustle? Is your spouse? Be honest.

Related: The Best Real Estate Books Ever

So… “Should I Invest in Real Estate?”

Clearly, the question “should I invest in real estate” is more complicated that it probably appeared on the surface, but for me: it works. It fits my goals, my lifestyle, and my skill set.  I’m passionate about it, and it’s working in my life, and in the life of thousands more.

However, as I said in the introduction to the post: it’s not for everyone.  It does take work, it does take some time, and it does take some creativity. However, you don’t need to do this alone. BiggerPockets is here for you. We are a community of 180,000 members focused on helping each other learn, grow, and find incredible success. If you aren’t already a member, sign up for a free account today and start engaging! Jump into the forums, send some colleague requests, and start growing.

Also, if you would like to learn more about the different niches and strategies you can use to invest in real estate, be sure to check out the Ultimate Beginner’s Guide to Real Estate Investing.  This free guide will give you a solid foundation to begin your real estate journey.

Questions? Comments? Leave your thoughts below!

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{ 10 comments… read them below or add one }

Greg Jackson July 5, 2014 at 6:32 am

Brandon,

Another well penned post!

Another benefit of real estate investing is stability; your investment is less likely to get whipsawed as it can in the stock market. Gary Keller writes about this in his book, “The Millionaire Real Estate Investor”. From 1973 to 2003, the standard deviation for real estate was 4.0 percent. Compare that with the stock market’s (NYSE) 16.8 standard deviation over the same period of time.

I still invest in stocks, but I also diversify by investing in real estate. Helps me sleep better at night.

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Jean Bolger July 5, 2014 at 12:21 pm

This is why I don’t try to convince my friends to invest in real estate! Even though it can kill me to see them not getting ahead the way I know they could, I figure that if they are suited to real estate investing then they’ll figure it out and start asking questions. As much as I’d like to to be a RE cheerleader I’d feel rotten if I talked someone into trying it and it didn’t go well for them. I know from my own experience that REI requires a lot of patience and that there can often be bad times before the good times.

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Larry Russell July 6, 2014 at 8:29 am

Excellent article with a nice summary of the Pros and Cons. This is why I made a firm commitment to growing my real estate investment business.

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Craig Horton July 6, 2014 at 8:48 am

The bottom line for me is that equity in real estate can compound at a positive rate where you can accumulate passive income and net worth that is not really possible with stocks and mutual funds. The Real Estate Business is a lot of work but long term benefits are awesome!! I have been an real estate investor for almost 40 years now and have no regrets about this business even though I have made mistakes and had challenges over time. Brandon’s analysis of the Real Estate Business is on target.

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steven harlow July 6, 2014 at 2:16 pm

Real Estate is just one of the asset classes I invest in and it has gone me well. But I don’t tell everyone to do it as I have seen some people go from rich to living under a bridge

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david July 6, 2014 at 4:10 pm

Just joined BiggerPockets and came by this article. Even till this day , it crosses my mind as to why i am deciding to do Real Estate and it’s true . Extreme patience is a must especially when things go wrong; i know it has its risk , but someone got to have their hands and feet wet , right ? And also , you have to have a purpose or a goal of some sort . So important . Loved the article ; made me think .

“Success is a journey , not a destination” – Bruce Lee

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Melodee Lucido July 7, 2014 at 3:41 am

Brandon, good article. I giggled as I read it remembering my view of crei “back then” before I started and now. I just told someone yesterday that there must be some drama queen n me to love this biz. Cuz, yeah, drama definitely happens. heh

As you say, it’s not for the faint of heart but it’s a ride!

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Norma Cole July 7, 2014 at 5:33 am

Hi Brandon,
Just another great article from biggerpockets. I am new to the real estate investing world and new to biggerpockets. It is extremely helpful to have these types of articles at my fingertips. I was happy to read that my personality appears to be in line with what is necessary for success in this business. The article really encourages you to take a good assessment of yourself.

Thanks a bunch,
Norma

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Craig July 7, 2014 at 9:54 pm

Thanks for the confirming article. I have been reading real estate investing material for some time now and attending the local REIs, but have come to the conclusion I don’t have the personality for it.

1. I don’t think creatively well.
2. I’m not good with numbers.
3. I have almost zero handyman skills.
4. I’m don’t have an outgoing personality and work better alone versus with a team.
5. I have no extra money to invest.

Again thanks for the article.

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Sara Cunningham July 10, 2014 at 3:31 pm

Great post Brandon as usual. Yes you are right it is not for everyone. Whenever I mention to anyone that is what I do they look at me like I’m crazy and say there is no way they could do that. Must admit when the going gets rough like it has the past 6 months with major maintenance roofs, HVAC, sewers etc I second guess myself but not enough to want to get out.

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