Back in the early 2000s investing in real estate was the sure path to wealth. Then the bubble burst. A few years later, you started to see books and hear infomercials telling you how real estate was the path to wealth. While investing in real estate is a path to wealth, it is not the only path. And I would argue as a landlord, it is by far not the easiest path to wealth either.
I am going to walk you through things I’ve learned as a real estate investor. The intent is not to deter you from investing in real estate, but to give you tips about the hurdles.
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7 Lessons Learned Investing in Real Estate
- It is Harder to Find Deals Than You Think
The infomercials make it sound like there are endless opportunities to buy rental real estate. While there are a lot of properties out there, finding ones that actually provide a positive cash flow are hard to come by. You will do a lot of searching just to find one or two properties that will be able to provide a monthly positive cash flow. Many people give up at this point because of how much searching it takes just to find one or two potential properties.
- Lots of Competition
And when you do find that gem, know that there is a ton of competition. First you have all of the other would-be real estate investors like yourself looking for and competing for the same couple of deals. Then there are the professionals. They’ve been doing this for a while and have lots of connections, so they tend to find the gems before you do. Many times they find them before the properties even hit the market.
- It Costs Money
While finding the gem is rare, buying it with no money down is even harder. In most cases, banks are going to want to see 20-25% down payment on the house because there is more risk of you defaulting or walking away. This means you will need to save up a decent amount of money in order to buy a property.
For example, if you are looking at a $175,000 property, you will need between $35,000 and $45,000 for the down payment. And in many cases, putting as much down as possible is the only path to get a positive cash flow out of the property. Of course, this leads to other ratios being out of whack, but I’ll get into this later.
- It’s Not Passive
There is work when you are a landlord. You have find and screen potential tenants. You have to have the property in good enough condition to rent. You have to collect the rent. You have to check in on your tenants from time to time. You have to respond to any issues and make needed repairs. You have to replace things as they break. And when your tenants leave, you have to repeat the process all over again.
While you can hire a company to do all of this for you, the rules regarding rental property change in the eyes of the IRS when you are passively involved as opposed to actively involved.
- It Takes Work
In order to be successful at real estate investing, you have to know the various terms and ratios. There are many of them out there and knowing them well will increase your chances of finding properties that are worth the investment.
If you don’t know them all, you can easily get yourself into trouble. Your analysis might show you that a property is a good buy using one ratio but a bad choice when using another ratio. You need to understand what each is saying and how it impacts your goals and decisions.
For example, take my point of putting a lot of money down to earn a positive cash flow. While this ratio works in your favor now, another ratio may not. You need to know this and what your ultimate goals are in order to make a decision.
- You Will Lose Money
Not overall, but at times you will lose money. Sometimes it is because you made a bad deal. Other times it is because of things outside of your control. For example, your tenant may have lost their job and can’t pay the rent. Or maybe there were new laws passed in your area that impact your rental property or housing prices in general. It is important to know going into it that you will lose money at some point.
This is why is it critical to build a buffer of cash when you are running the numbers. Having that safety cushion could be the difference between a short term loss of money and a long term loss of money.
- You Need People Skills
You will be dealing with realtors, tenants, contractors, lawyers, accountants, etc. In other words, you need to be able to communicate effectively with various types of people and during various stressful times in life.
You will also need good negotiating skills for buying the property and for when it comes time to raise the rent on your tenants. The better you are with people, the easier investing in real estate will be for you.
In the end, investing in real estate is not an effortless path to riches. However, it is a solid path. The goal here was not to talk you out of investing in real estate, but rather to show you that it isn’t as perfect as the infomercials make it out to be.
You won’t be sitting around on the couch opening up letters with monthly rent checks at first. You will have to do a lot of hard work to get to that point. Remember, there is no get rich quick scheme out there that works. If you want wealth, you have to put in the time, hard work and effort to have a shot at making it. Real estate investing is no different.