10 Common Real Estate Investing Myths
Over the past ten years I've learned a lot about real estate investing. At times I've had to learn the hard way through costly experiences and mistakes along the way.
I've come to learn that there are a lot of misconceptions and investing myths out there, and my goal is to help dispel those myths so that you can save yourself from making some of the same mistakes I've made over the years.
Myth #1: The Value Of Real Estate Doubles Every Ten Years
This was the belief I had when I purchased my first house in 2007. Instead of doing my own research and coming to my own conclusion, I bought into what everyone else was telling me, and that was no matter what I purchased, the value would double in ten years.
I can tell you from personal experience that this is a myth, and it's a terrible investment strategy. I'm actually surprised that I still see real estate guru's making this bold statement.
In order to understand where this came from, we need to look at what happened in the early 2000's where annual appreciation went as high as 12.2%.
Myth #2: You Have To Have A Lot Of Money To Invest
I can personally confirm that this myth is just not true. You do not need to have a lot of money to invest, though you do have to understand that if you don't, you'll have to be more creative.
You can read more about how I was able to acquire the majority of my portfolio through minimal or zero down investing strategies here.
One of my favorite minimal down investing strategies is the BRRR Strategy, where you buy a fixer upper then remodel it, rent it out, and refinance it using the new appraised value to pay off the purchase loan (usually a hard money or private financed loan).
The biggest risk of this strategy is that the property will not appraise for what you had hoped, at which case you would need to bring money to close on the refinance or sell the property.
There is a little prep work for this strategy, which includes making sure you can qualify for a conventional loan when you refinance, and finding a lender that will give you a loan on a property that is in bad shape. You'll also need a contractor who can do the work for you, and get it done fast.
Myth #3: It's Best To Buy Within 30 Minutes Of Where You Live
For some this may actually be true, though for most it's not. The most important part of real estate investing is making sure you are only buying properties that help you achieve your goals.
If your goal is to eventually replace your income, and you live in an area where real estate is very expensive, then it is highly unlikely that you'll find properties that cash flow.
It can be a challenge trying to decide where the best place to invest is, and these are the criteria that I look at when deciding whether to invest in a certain area:
- Population Increases: I look at this as a measure of how desirable a place is to live. If the population is decreasing, then that could be to lack of jobs, crime, schools, or a number of things.
- Crime Stats: I invest in the long term, and I want to attract good tenants who also want to stay long term. If an area is having an issue with crime, then it's likely that people will or are moving out of that area. High crime rates in an area will make it difficult to attract good tenants.
- Price to Rent Ratios: The closer to the 1% rule the better.
- Price Appreciation: While I do not use appreciation as a factor in an individual investment decision, I do look for price appreciation in an area as an indicator of the overall health of the market. I'm not looking for double digits, though consistency is important. Take Nashville and Indianapolis, in the last recession these cities saw very little devaluation and they've not had big fluctuations in value over several market cycles.
Myth #4: You Need To Own A House Before You Buy A Rental
If you have not yet purchased a house, and you know that you want to invest in real estate, now would be the perfect time to consider buying a multi-family property as an owner occupant.
When you use a loan as an owner occupant there is a requirement that you will need to live in the property for a year, though a year goes by really fast and you'll have essentially killed two birds with one stone.
Another thing to consider is that if you first buy a multi-family property such as a duplex as your first property, it will actually be easier to qualify for the next property because of the rental income you'll receive.
Most people don't know that rents from your rental properties are calculated as income when it comes to qualifying for a mortgage, so if you decided to dedicate the next 5 years to buying rentals as an owner occupant and moving from property to property you could effectively afford a much nicer house in the end. Just a thought :)
Myth #5: Raising Rents Will Cause Tenants To Leave
This is a common misconception, and I've even heard it from property managers. While it is true if you raise the rents too much at once you may experience a vacancy, keeping rents too low for too long just because you're worried that the tenants may leave will cost you.
The biggest challenge is usually when you first acquire a property and the rents are low. In these types of situations I almost always run my numbers with a higher first year vacancy rate assuming that the old tenants are not going to pay the new rental rate.
I've found the best option to be in raising the rents in smaller increments so as not to make such a drastic change for our tenants, and to help offset the difference that I could be charging.
For example, I own a duplex in Arlington, WA where earlier this year the rents were $1,000 per month. After doing some research on Zillow and Zilpy, I found that fair market rents were closer to $1,200 per month.
To keep the current tenants and avoid an expensive vacancy (which would defeat the purpose of increased rents in the first place) I decided to raise the rents from $,1000 per month to $1,100 per month. This would give me an extra $200 per month in income with no capital improvements required, and the tenants would see that they were still paying less than fair market rent.
The plan worked and I received no push back.
Myth #6: You Should Only Select Tenants With A High Credit Score
Before we unpack this myth we need to understand how credit scores are calculated.
A persons credit score, also known as their FICO Score is calculated based on the following:
- Payment history
- Amount owed in relation to credit limit
- Length of time
- Type of credit/number of tradelines
For younger people with very few credit accounts and only a few years of history, one late payment could significantly lower their score.
Most often I see lower credit scores due to medical bills or student loan delinquencies. This low credit score has nothing to do with their ability to care for a property and even pay their bills.
Judging a prospective tenant on credit score alone is poor logic.
Think about it this way - if a tenant has a fantastic credit score and the market is favorable for home buyers, how long do you think that tenant will stay a renter?
In my personal experience, the tenants with the better credit scores have stayed less than those with lower credit scores. Most of them went on to buy a house.
It's great that these tenants are buying homes generally speaking, though not when you're in the business of leasing your home out to renters.
What I place the most weight on is their previous rental history, including the references from their landlords, and their ability to afford the rent.
If a prospective tenant has been upfront with their low credit score, and have a reasonable explanation then it's likely I'll give them a chance.
Myth #7: It's Best To Buy In A Down Market
You can build a highly profitable rental portfolio in any market, and some of my best deals have been purchased recently, in one of the hottest markets I've ever seen.
While properties may cost less in a down market, rents are often lower as a result of the economic conditions that caused the down market so it's all relative.
What really matters most is finding investment opportunities where you can instantly achieve a high cash flow, and you can expect consistent appreciation over time.
Myth #8: You Need To Know Everything Before You Start
There is no way any person can know everything. I believe the most important thing you need to know is what goal you are looking to achieve, and then what strategies you will use and where to source investment opportunities that will help you achieve that goal.
I've spent countless hours documenting all of the different investment strategies and compiling all of the most important information that a person would need to know in order to get started investing. This information is available to you here.
If online courses are not your thing, there are plenty of options for learning more by attending Meet Up's or networking with other investors.
Myth # 9: You Have To Earn A Lot To Be Able To Get Financing
Another myth that I've proven to be incorrect.
When I purchased a duplex that I owner occupied I was earning $15 per hour and I was financing $196,000. With a car payment and some other bills I would have never gotten approved for that mortgage had it not have been for the rental income on the other unit.
Anyone who purchases investment real estate gets to use the rental income of the property to offset the new mortgage payment, even if the property is vacant when you buy it.
If the property is vacant, the appraiser is then asked to include a rental analysis with their report, and the lender uses that rental analysis as income to qualify.
So long as you do not have a significant amount of other bills it should be rather easy to qualify if the property is a good deal.
Myth #10: You Need To Dedicate A Lot Of Time To Investing In Real Estate
While you can dedicate a lot of time to investing in real estate, it's not a requirement.
I have clients who work 12 hour days, own 20+ units and still have time to travel the world and enjoy life.
Investing in real estate does not have to take a lot of time. What can take time is building your investing team, and then once you've assembled that team it requires less time and effort.
Choosing the right team members is key to building a profitable portfolio with little time and effort.