A few years ago, my good friend asked, “Do you really think it’s possible to make money in real estate?” He continued, “My dad tried before. They all say, ‘If it’s so easy, then everyone would do it.’ They don’t think you can do it.”
The funny part — I had already been doing it for a few years and was very successful at it.
Real estate is a tried and true source of wealth that people have been investing in for literally thousands of years. Land has been the primary source of income, power, and conflict since the dawn of civilization. Lords would use any law and create any excuse to take more of it.
Now people have a Rolodex of excuses they use to avoid real estate investing. It’s strange how things have changed.
So today, I’ll tear down some of the excuses that I have actually heard.
1. The classic: “I don’t want to fix toilets and leaky faucets.”
This is the most common excuse I hear. Too scared to get started? Whip this one out. Thought about investing but couldn’t figure out how to get started? Leaky faucets stopped you. Anyone who has thought about investing in real estate but never gets started can use this classic excuse.
Honestly, who enjoys replacing toilets? I doubt even plumbers enjoy it. That’s why we have plumbers, though. They get to do the work that landlords don’t want to do.
I’m going to digress for a moment.
Real estate investing is different than property management.
Many investors choose to manage their own properties and projects. They either do it out of necessity (the deals don’t make enough to hire other people), or they just want to pocket the extra cash and reinvest it.
Just because many investors act as their own property managers does not mean property management is part of the job description of a real estate investor. Many investors are extremely successful and never touch a paint brush or leaky faucet.
The thing is, property management is a J.O.B. — while investing is not. You can do a quick search online and find a dozen property managers who will fight over each other to manage my properties. So, you can hire someone to do the management and just focus on finding great deals.
2. “It’s too risky.”
Well, yes, there is risk involved. If you’re the kind of person that prefers a 1% return on U.S. Treasuries instead of the 7-10% you’ll probably get in the stock market, then there is really nothing I can do for you.
To you, everything is too risky.
For everyone else, we can talk about the risks.
A Quick Refresher on Risk Premium
“Think of a risk premium as a form of hazard pay for your investments. Just as employees who work relatively dangerous jobs receive hazard pay as compensation for the risks they undertake, risky investments must provide an investor with the potential for larger returns to warrant the risks of the investment.” — Investopedia
Investopedia has a really solid article and video about risk premium, and I highly recommend checking it out.
Risk Premium & Real Estate
Real estate risk is measured with the capitalization rate. If the risk-free rate of return is 1.5% and a particular property has a 6% cap rate, then the risk premium is 4.5%. A 10 cap property would have a risk premium of 8.5%.
Let’s compare this to the stock market, with which many investors expect to yield between 7-8% return (the historical return over the last several decades).
If the risk-free rate is 1.5% and you are expecting 7% from stocks, then the risk premium is 5.5%.
So, the 10 cap property is riskier than stocks. The properties with a cap rate below the expected return in the stock market would be deemed by the market to have less risk. In this example, the 6 cap property is a safer investment than the stock market.
Note: Expected returns in stocks and real estate change constantly based upon changing economic conditions. I’m using these numbers as an example only.
3. “If it were easy, everyone would do it.”
Say someone said, “I will teach you exactly what you need to do to earn a ton of money and retire in just a few years. Oh, and it’s super easy too!” What would you do?
You’d tell the guy to go pound sand.
Even if it was amazingly easy, nobody would ever do it because nobody would trust it.
A strange thing about human psychology is that people are generally afraid of what they don’t know. From something as simple as sticking with the same overpriced insurance company year after year to keeping the same job with the same company for 15 years, people abhor change.
It’s probably a survival mechanism. You are surviving and fulfilling your basic needs where you’re at, so you don’t want to risk it for something with unknown results. I get it.
But the answer is still NO — even if it was easy, still not everyone would do it. In fact, most people would never attempt it.
I’m not saying real estate investing is easy or risk-free. Even experienced investors lose money sometimes. Just about anybody can do it and succeed, but most people will never try.
More specifically, it’s kind of silly to judge the value of an idea on the actions of everyone else. Just because nobody is doing it doesn’t mean it’s impossible to succeed at it.
4. “Only rich people can invest in real estate.”
In some ways, this is true. SEC rules have (and still) limit the investments that non-accredited investors can undertake. The rules are changing, slowly, and crowdfunding is opening this up.
Although regular folks haven’t been able to invest in their local shopping mall or high-rise for the last 80 years, they have been able to focus on small real estate investments alone or with a close group of friends or family.
Getting funding for deals is easier than it’s ever been.
Information is more readily available to the average investor.
Today, more than at any point in history, real estate investing is available to the “average” person. So, don’t let this hold you back. You probably can’t invest in a 30-story tower, but who cares?
Quit Making Excuses
As you can see, every “reason” is essentially some derivative of the same excuse: “I would invest in real estate, but…”
I don’t like to fix things, it’s too risky, or it’s too hard.
I can’t tell you that real estate is the right investment for you. I can’t tell you it fits into your investing goals and strategy. I also can’t say that you’ll make a ton of money doing it.
I can say that if you find yourself saying any of these excuses (or another derivative), just stop and be honest with yourself. You should at least be honest with yourself.
Do your research, learn the markets, and consider the pros and cons. If real estate is a bad fit for you, you’ll figure it out pretty fast.
You also may find that it’s not quite as difficult as you thought.
Which of these excuses have you heard before? Any you’d add to this list?
Leave your comments below!