5 Dangerous Real Estate Investing Myths Beginning Investors Believe
How exactly do these crazy myths get started? Myths as we know them come from a variety of places: sometimes from the tall tales of long-gone societies, others from a desire for mystery and the unknown. We call them old wives’ tales and urban legends — and everyone loves to talk about them.
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In real estate, myths are easy to blame on gurus! However, I am not going down that path. Real estate investing myths are started in all kinds of places from stage gurus to the REIA meeting speaker circuit to the actual REIA clubs themselves. Investors with little and sometimes no knowledge whatsoever blabbing a story that makes them feel important. Most are harmless, some are not.
Not all myths are innocent fun. There are myths that plague the world of real estate investment. Some of these do no real harm, but others prevent investors from reaching their full potential. Worse, they can cause missed opportunities and poor decisions when real estate investors buy into misconceptions about the industry.
For me, the worst myths are the ones that cause investors to misuse their best resource. It is not money. It is not relationships. The best resource an investor has is time, and it is the one thing we cannot gain more of. Once time has passed, it is gone, and time is the one thing that when used in conjunction with other resources and decisions, can build true wealth for real estate investors.
So with that, it’s time to pull back the curtain and debunk some popular and potentially harmful real estate investment myths.
The Truth Behind 5 Real Estate Investment Myths
Myth #1: Real estate investors have no place in the recovering housing market.
Some believe that when the real estate market recovers and homebuyers regain both confidence and buying power, there will be no room left for investors on the market. At the very least, most expect the number of investors to diminish. While it’s true that many investors choose to leave the business, it’s not necessarily because the market pushed them out. There are a variety of reasons why an investor would choose to leave — and while the recovering market may make it more difficult (relatively speaking), investing won’t die when the market gets back on its feet.
The shifting cultural values and lifestyles in the past few decades has made renting a popular and viable alternative to homeownership. Many have come to prefer it — and the state of the market won’t change that. Let’s not forget that the lull in the financial markets since 2008 has also caused home building to slow to a standstill across the U.S.
It is estimated that we are several million homes behind from a building and demand stand point. That will create an enormous opportunity for real estate investors who are building and developing for speculation on demand and not necessarily holding for long-term returns. Some truly creative investors are building for rent and having great success. Remember, real estate investors come in many shapes and sizes and do many things within the real estate market. Investors absolutely have many places in the recovering housing market.
Myth #2: Past performance is a reliable predictor for future investments.
While there’s something to be said for learning from the past, we can’t rely on it to predict our future with accuracy. Glean wisdom from both triumphs and missteps in your investments, but don’t expect a future investment to follow the same pattern as the ones before it. This kind of thinking leads to reckless decisions based on speculation, which is never a good idea.
When we consider the investment environment that we have been through since 2008, looking back on recent past performance would seem almost silly at this point. Markets move and adjust, and we have to remember that real estate performs locally. Our performance of one strategy in one market cannot be used as a barometer for performance of the same strategy in another market. We have to be smarter than that type of thinking if we want to continue to have success.
Myth #3: Investing in real estate is a big time sink.
Investing in real estate is a commitment. There’s naturally some work that has to be done, as no successful investments can be truly passive. But investing in real estate isn’t the burdensome time commitment many seem to believe it is. It requires organization, and if you are not organized, then it requires hiring someone who is! They need to cover the weekly organization, from opening mail, returning emails and returning calls to tracking insurance and payments. Even passive investments require work and diligence so no investment can ever or should ever be passive.
The idea that real estate investment is a huge time sink, though, is largely due to the idea that investors have to act as landlords to their properties. While some choose to do so, it’s not necessary. Investors can hire property management companies, or better yet look to turnkey investing to keep things manageable. It simply takes organization, and smart investors can leverage good people to prevent them from getting buried in a time sink.
Myth #4: You should only invest locally.
There are definite benefits to investing in local markets. After all, you know it. You know the local economy, the people, the neighborhoods and the other real estate professionals in the area. By not branching out into other markets, however, you’re missing out on some great opportunities. Plenty of investors purchase properties in other up-and-coming markets and find great success, thanks to good turnkey real estate companies and careful research. Still others build their own teams in other markets without going the turnkey route, and they find great success. How you invest remotely is going to come down to personal preference.
While we don’t recommend buying in an unknown market without careful consideration, remote investing is a perfectly valid and profitable path to take. Don’t miss out on a hot market just because you aren’t right in the middle of it. Advice is often given on the BiggerPockets Forums that investors, especially new ones should invest locally. For many reasons, I think that is practical advice. However, when investors say that everyone should invest locally and that locally is the only way to be profitable — regardless of why they are giving that advice — that is a myth that needs to be busted. Many, many investors are simply built and prefer to be passive, and their minds are open to investing in other markets. Those investors should ignore this myth and explore the best markets for them personally to find success.
Myth #5: You should avoid risk at all costs.
We all know the correlation between risk and reward. Risk, like conflict, is not inherently a bad thing. We may associate it with negative emotions — uneasiness, anxiety and worry — but it’s not bad. Without risk, there’s no reward. We have to be willing to weigh the pros and cons of any endeavor and be willing to accept and embrace risk if we are to find great success investing in real estate. I love risk — when it is properly calculated and weighted against my full portfolio. The difference between me today as an experienced investor and years ago as a new investor is I understand how risk plays into my portfolio, and I no longer take unnecessary risks. Simply calculated and well thought out!
All real estate investors would do well to carefully research any pieces of advice they receive, whether from individuals or other sources. Instead of buying into myths as face value, we can lean on experience and wisdom when we make decisions.
What real estate investment myths have you believed in the past?
Share them with us in the comments.