The Top Six Myths About Real Estate Investing

Whether you have heard stories from a distant uncle, watched dramatic renovations on tv, or read dozens of books about real estate investing, there is a lot of misinformation floating around. It can be hard to know what to believe. The Urban Investor is here to divide fact from fiction and unveil The Top Six Myths About Real Estate Investing:

6. You need to have a business name, logo, contractor, accountant, attorney, etc. before buying an investment property. This idea of having everything lined up perfectly before buying a property is a chapter out of a generic “tips for successful business” book and simply not true. Don’t spend time and money on all of these things before you know if you even LIKE investing in real estate. One of the best parts of investing is that you can do as little or as much of it that you like. Start out small and stay small, or grow incrementally if you desire. If you get to the point of pursue investing as a career, you will naturally make connections with people that you need to know and be able to get referrals when you need to. Don’t worry about if you need to be an LLC or an S-Corp if you are just starting out. Focus on knowing the values of property in the market that you want to invest in. Be patient and get a good deal. It doesn’t have to be a home run, but start out with a winner.

5. It is better to wait until the market improves to buy more properties. This myth can creep into the minds of beginners and experienced investors alike. The reason people believe it is more from fear and emotion than from actual investment calculations. Nearly everyone is familiar with the simple mantra of, “Buy low, sell high,” but the herd mentality makes it difficult to go against the grain and buy when everyone is panicking. Investors who wait until the market improves often missed their best chance to pick up properties at a discount. The best antidote to the fluctuations of the market is to have a consistent purchasing plan that can sustain volatility; a plan that relies on the numbers and not your emotions.

4. It is very risky and you’ll go bankrupt, or you’ll buy a money pit that consumes all of your life savings. There are stories of people striking it rich in real estate, and stories of complete and utter failure. Of course those are the two extremes, and the vast majority of investors end up in the middle, finding some level of success. Sure, there are risks. Any time hundreds of thousands of dollars are at stake in a free market, there is a chance money will be lost. But if you have an even-tempered, thoughtful approach, and buy a property in a decent area that is expecting some population growth, you should be fine. What if I buy a terrible house that eats all my money? It’s pretty simple. Don’t buy a terrible house. Start out with a small, low-risk two bedroom that just needs paint and carpet. Wait to buy the houses that need major renovations until you’ve been in the business awhile. What if interest rates spike and the whole economy plunges again? Well, people still need a place to live. Wise investors will maintain large chunks of equity in their properties and keep an emergency fund of cash reserves on hand that are large enough to weather a storm. What if I can’t sell my properties and I’m forced to declare bankruptcy? The truth is, if a drop in the economy makes you declare bankruptcy, then you weren’t financially stable enough to be a successful real estate investor anyway. This business works a lot better if you know how to handle money.

3. It is easy and anyone can do it. This myth is almost the opposite of the previous one. Instead of being afraid and not buying anything, it is believing that investing is easy and therefore you are not adequately prepared. It is acting too quickly in overconfidence and buying the first property you look at. Perhaps a decent share of the population could own one or two rental houses and handle that easily. But being an investor for a career takes consistent time and resources. Becoming successful requires the right type of personality that is both adventurous, creative, big-picture, and attentive to details. More than anything, it requires self-motivation. If you need a boss to keep you on task and a weekly paycheck, this is probably not the best career for you.

2. You will get emergency phone calls from your tenants at 2:00AM. Emergencies do happen, and if you manage your own properties, you will get repair requests. But I have never had a tenant call me in the middle of the night for a combined ten years of rental time. There are many investors who never deal with tenants or repairs at all. They simply hire property management companies to handle those aspects. Of course, that convenience comes at a cost. In my experience, tenant selection has a direct correlation to the number of tenant hassles. If you (or your property management company) selects quality tenants with a proven track record, then very few issues arise. Time won’t be spent tracking down late rent, or dealing with evictions. The dwelling, on the other hand will need attention from time to time, but that is expected. A water heater has a life span and when it is done it will need to be replaced. That is a fact regardless of the quality of tenant. Just keep in mind that buildings don’t pay the rent, people do.

1. You will become a millionaire in 18 months, or your money back guaranteed! There are so many wild claims out there about how to make the most money possible with the least money possible, it can be exhausting. Some often-hyped methods such as wholesaling, buying foreclosures, and lease purchases can be used quite effectively. But they aren’t complete shortcuts to lasting wealth.

There are basically two different schools of thought in real estate investing. One focuses on passive income, where your property assets are working for you through rental cashflow and cumulative appreciation. Single family houses, commercial buildings, and multi-family apartments can all be profitable as long as the buildings are leased at solid rental rates. Over time, investors can continue to raise rents to provide greater income. The second approach uses wholesale deals, renovations, quick flips, and other techniques to earn income. And they can earn quite a bit of income in a hurry. But with these strategies there always has to be another deal to earn the next paycheck. You have to keep working. It isn’t passive. There are no assets that you hold onto for long periods of time.

Some investors combine both active and passive investment approaches, while others are very focused on one aspect of real estate investing. There is no right or wrong method. It is up to each individual to find the optimal balance. The investors who are successful for decades aren’t over-leveraged. They don’t borrow as much as possible to buy as much as possible. Instead, they build a portfolio of properties over time that leads to financial independence and wealth, but definitely not in 18 months.