The 5 Most Annoying Misconceptions that Newbies Love
The items below are all things I hear repeatedly by investors; they aren’t necessarily misconceptions for every investor, though. In particular, investors just starting out need to be aware of the following:
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
Everyone hears how easy wholesaling is and how you can make soooo much money doing it. Yes you can make a lot of money, but it's not easy. It takes mega amounts of work. Additionally, wholesaling isn't even investing.
Unless you count getting a return on your time (not money) investing, but in reality that is called “working”. If you are good at wholesaling and you really enjoy it, do it. It really is a great job and can pay a lot. You will also learn tremendous amounts of amazing information about the real estate investing world and the ins and outs of investment properties.
But if you are new, don't just jump on the bandwagon with everyone else because ‘everyone starts with wholesaling'. Be yourself and do what you really feel a passion for. If you get on a BP forum and tell the BP community how excited you are about getting started with wholesaling, make sure it's because you have already started the basics of wholesaling and you are looking forward to pursuing it further. Don't just say it because it sounds fancy and you hope to make thousands overnight.
2. The 2% and 50% Rules.
The days of the 2% rule are nearly gone. There are still 2% deals out there but most likely they are war zones. Every now and then you will still find some (I guarantee someone is going to comment saying their whole town is full of 2% deals), but if you are shopping for properties and requiring that you find one that meets the 2% rule, you are seriously off-base.
For one, you’re unlikely to find good properties that meet it. Two, if you are so focused on something that is meant to be a guideline, you’re inevitably not looking at other aspects of a property and what makes for a good investment. I feel confident in saying that with real estate prices and cap rates where they are now, if you actually do find a 2% deal, you could be setting yourself up for a rough investment. The 50% rule is a good guideline but it should never be the end-all. It doesn’t even hold up in some markets and can give you a false sense of security.
3. Cap rates.
Speaking of days being gone, before you start telling everyone what cap rate you are going to require on a property to buy, make sure you know what the going rates actually are. If you say you want a minimum of a 15% cap rate on a property, you are likely not going to be getting a property. Unless you are that war zone investor, as with the 2% rule. Same with my 2% rule rant, if the cap rate is the only thing you are focused on, you are likely to be overlooking other critical factors that make a solid investment property. Don't get tunnel vision. The reality is that a stated cap rate is only that- stated. It is no guarantee you will actually ever get it, so if you aren't looking at other factors (tenant quality, property quality, etc.), you just may never see that number. You may not even see half of it. Don't think I'm exaggerating. It's happened to me.
You don't have to be a landlord to be a "good" investor. In fact, I think you are a better investor if you aren't landlording your own properties because you understand the value of your time. I do think investors who truly like to tinker with their own properties, maybe because you are handy or enjoy the work, should be a landlord, only because you enjoy it. But landlording to save $100/month or because you think you should learn the ins and outs of managing a property are ridiculous. If I don't have future plans of being handy or being a property manager, why do I care if I know the ins and outs? I want passive income, that's all. And passive does not equate to landlording, because landlording equates to work, which is the furthest thing from passive.
5. Emerging Markets.
There is a list of “emerging markets” that continues to pop up in the forums lately by investors who apparently really like this list. I don’t doubt the validity of the list, but the only thing that list is good for in terms of investing is to know where appreciation is likely to happen. This is ironic, because any investor banking solely on appreciation has lost his mind. Banking on appreciation is the same thing as predicting the future with a crystal ball. What exactly do you plan to do if that appreciation doesn’t happen like you anticipated? Then what?
Buy for cash flow first, then hope for appreciation second.
The other major problem with that emerging markets list is that several markets on there are some of the worst markets in the nation for cash flow. Hello misleading for buy and hold investors! The only good (smart) use for that list? If you pick a good cash flowing market and then it happens to be on that list, awesome! That means you will have a nice potential for appreciation on top of your good cash flow. That's it. Don't use it for anything else.
Be smart enough as a new investor to formulate your own opinions, based on solid advice and research! Be an individualist, don’t be afraid to go against the crowd! Have you ever noticed how unsuccessful the actual crowd is? With wholesaling for example, there are some very successful wholesalers, many of which write on this site and have amazing sites of their own. I’m not referring to those folks, I’m referring to that group of newbies who go on and on about how they are planning to become a wholesaler. How many actually do? Not many. Make your own path. You’re more likely to succeed.
Photo Credit: nathangibbs