The Catch-22 of Real Estate Investing

Historically, real estate has been a popular investment strategy, but profitable investments were not available to the masses. In the last few years, a more diverse range of investors have started to dabble in this area. The popularity could be due to a series of popular “fix and flip” shows, the realization of ROI when dealing with restoration of downtrodden neighborhoods, or the fact that demand for housing is high, but the supply is low. Whether it be any of these reasons, all of these reasons, or some other reason, it is safe to say that there is no better place to put your money right now than real estate. 

Now that we’ve established that real estate is a great investment avenue, we should also talk about the downside. Historically, to make a worthwhile return on your investment, you were required to have a ton of cash at your disposal just to sit at the table. If there was an opportunity to invest as little at $5,000, if you didn’t have a net worth of at least $1 million (excluding your primary residence), you would’ve been out of luck. This scenario was a huge Catch-22. You have money to invest with a goal of becoming wealthy, but you couldn’t invest because you weren’t wealthy. Let’s imagine you have a considerable amount of cash sitting in a savings account and you’re able to put 25% down on a $100,000 investment property. If you could charge $800 a month for rent, but only have a $400 mortgage payment, that’s a pretty good return...that is, if that was all you had to worry about. When an issue arises, and you will have issues, you will be responsible. Either you will have a property management company handling your property at a percentage of your profits, or you’ll be handling maintenance yourself. Either way, those scenarios aren’t ideal.

For those looking for a bigger risk/reward scenario, there are always commercial buildings available. You could probably find a location and pay between $800,000 to $1 million. Depending on where you purchase this property, $1 million isn’t guaranteed to get you a prime location. Now you could be in a situation where your property is in an undesirable neighborhood, you’re responsible for property management, and your tenant pool could be as undesirable as your location or even worse, non-existent.

With any investment strategy, there are risk. A way to mitigate those risk is to buy an interest in properties where the daily management is someone else’s responsibility. This is where is where it gets good, but I'll save it for the next post.