Investing in real estate can be an exciting time. But you’ll find that when you begin to speak to others about it, everyone will have something to say or some advice to give. Many folks will have their own word of warning to give you, usually involving some landlording horror story that they heard from a friend. You know the kind, the stories about tenants who stopped paying rent or flushed toys down the toilet (and always at 2 am!).
But while these stories are often repeated, they’re not as common as you might think. The majority of the time, rental property is a solid investment that performs consistently well. The fact is, these stories are more memorable, and therefore, they get repeated a lot more. Meanwhile, though, stories about rentals generating income and things moving forward like clockwork every month just aren’t as exciting, so you don’t hear about them as much –even though they’re much, much more representative of life as a landlord.
When it comes to real estate investing, exaggerations and misconceptions abound. Other rumors and often-repeated lines include the following:
“House flipping is a fast and easy way to get rich,”
“Being a landlord is hard work,” and
“You need to be wealthy to invest.”
When you’re just getting started with rental property, separating fact from fiction can be challenging. To help, we’ve rounded up and addressed seven common real estate investment myths that often get thrown around.
Read on to ensure you’re headed into the game with a clear head and the facts laid out straight.
Myth #1: “Buying fixer-uppers is a fast and easy way to get rich.”
Perhaps one of the biggest rumors going around now is that investing in fix-and-flip properties is a quick and easy way to turn a profit. After all, the popular TV shows buy, fix, and sell in under an hour, so how hard can it really be?
Debunked: While it is possible to make a profit and be successful with fix-and-flip properties, it isn’t a ‘get rich quick’ tactic. Real estate investing (and this includes both house flipping and rental properties) requires a careful, calculated approach.
While house-flipping can be a good strategy for some investors, it’s important to ensure that you’ve run the numbers and they’ll work in your favor. It’s been suggested that you shouldn’t pay more than 70% of what a property will be worth after the cost of repairs has been factored in (After Repair Value, or ARV). This will help to protect you from any potential downturns in the market.
With rental property, on the other hand, it’s another story altogether. With rental property, you’ll be investing for the long-term, so temporary fluctuations in the market will affect you less (as long as the property’s been responsibly financed). You’ll also be able to generate cash flow each month as the rental income rolls in. Additionally, you won’t have to time the market perfectly when selling in order to make a profit. Instead you’ll have options, and can wait until the market recovers in order to sell.
So at the end of the day, while real estate can be a great way to generate long-term returns and grow your wealth, it’s not a scheme that you can use to “get rich quick.”
Myth #2: “It’s best to invest close to home.”
Some landlords feel that in order to find success, they must invest close to home. Certainly not out of town and definitely not out of state. After all, you know the ins and outs of your hometown and state, plus you can easily keep an eye on your property.
Debunked: While it is true that investing in your hometown has some advantages, this doesn’t mean investing close to home is always necessary or even a good idea. It might be a good idea for your first property and if you’re planning to oversee the property yourself, but when you start growing your portfolio, you’ll want to start casting a wider net and looking for potentially better opportunities. Don’t feel pressured to limit yourself to investing close to home simply so you can keep a closer eye on the property. After all, once you start growing your portfolio, you may find that you’ll want to outsource some of the work to a property manager anyway.
Myth #3: “Being a landlord is hard work.”
Some people feel that once they become a landlord they’ll have no time to do anything else. Everything from fixing toilets to managing the books, doing maintenance, and rent collection are now the definition of weekend plans.
Debunked: Sure, being a landlord can take up a lot of time, but it doesn’t have to. The truth is you don’t have to do everything on your own, and many landlords find that by outsourcing allows them to grow their portfolio far beyond what would have been possible if they were overseeing everything on their own.
While you can save money by performing maintenance tasks on your own or handling the books by yourself, if you don’t have time for it or don’t enjoy it, then outsource it. A good property manager can handle the day-to-day ins and outs of your property while you focus on the aspects of investing that excite you the most. For landlords today, there are options that allow you to be as hands-on (or hands-off) as you’d like.
Wondering what it is like to be a landlord? Read about The Most Time-Consuming Aspects of Being a Landlord
Myth #4: “You need to be wealthy to invest.”
Some people believe that in order to start investing, you must first be wealthy, have a 20% down payment, and access to unlimited funds. After all, investing is expensive, and don’t even think about investing with debt!
Debunked: While having access to unlimited funds helps (but what situation wouldn’t it help?), it isn’t a requirement for investing. While some banks require 20% upfront for investment properties, there are other options available to those who don’t have the funds for a sizable downpayment.
FHA loans are one option available to help first-time buyers get on the housing ladder with a low down payment (3.5%). With this option, you’ll need to reside in the house as your primary residence, but if you buy a duplex, this would allow you to rent out one side while you occupy the other side rent-free. This method is called house hacking, and it’s a strategy that many first-time investors use to get on the housing ladder.
Don’t let the myth that you need unlimited funds prevent you from getting started in investing. Do your research, discover your options, and get started.
Myth #5: “It’s tremendously risky.”
Often people will say that investing in stocks is a safer option, that investing in real estate is risky. After all, you don’t know how the market will fluctuate or if you will be guaranteed tenants 100% off the time.
Debunked: It is important to realize that no investment is 100% risk-free. However, there’s a lot that you can do ahead of time to mitigate problems and lower your risk, allowing you to ensure that you’re investing in something that will produce a good rate of return.
Investing in real estate has risks, yes. But it also has benefits that other investments do not have, such as the security of having a place to live or a tangible investment. Investing in real estate offers you the unique advantages of having a monthly income, even during times of economic downturn, when many stock-based investments would stop paying dividends.
As President Franklin Roosevelt reportedly said: “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
Myth #6: “You have to time the market perfectly.”
Some people say that in order to find success with real estate investing, you need to time the market as carefully as possible.
Debunked:
The problem is, none of us can predict the market. We can, however, do our research so that we have a good idea of what we can reasonably expect in the near future, and then invest accordingly. With rental property, as opposed to fix-and-flip property, you’ll have far more leeway when it comes to timing the market, as you’ll still be able to collect rent, even in an economic downturn.
At the end of the day, it’s important to run the numbers and do your research. Find an investment strategy that will work for you. Then get started. When financed properly, and purchased at a good price in an area that’s expected to experience growth, rental property has proven to be a solid investment for many investors, time and time again.
Read more about timing the market here: Timing the Market - Is It a Good Idea?
Myth #7 “Cities are the best places to invest.”
To increase your chances of success, some people will advise you to only invest in fully developed communities or well-established neighborhoods. This will give you a clearer picture of what you are investing in, and help you understand what you are getting into before you actually sink your teeth into it.
Debunked: While there is some truth to this, it is important to remember that investing in an emerging market; an area that’s projected to see growth can offer better returns. Investing in major metropolises can be expensive, and even though your revenue might be higher, your returns could easily be lower due to increased costs. Often, city rentals have lower yields than rentals in secondary markets or many places in the Midwest. Investing in those areas that are on the cusp of growth or projected to have some growth soon, can be an affordable way to get started.
Head over to the Renters Warehouse Market Research Center to find data on housing markets across the country. Find an up-and-coming market.
It is important to remember that you take the advice of others for what it is: advice. Do your own research, and create your own investment strategy; one that’s built around your big-picture goals. Don’t base your entire investment on the advice of a well-meaning friend or family member. The time that you invest into doing your own research will allow you to discover what will work best for your own situation and personal investment journey, and in the end, will prove to be worth it.
It is possible to have a stress-free investment! At Renters Warehouse, our goal is to help simplify investing: from start to finish. From our portfolio investment services, to market research tools, and excellent property management services, we make the process easier. Visit us today to get started!
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