Copyright © 2015 Eric Tyson and Robert S. Griswold. All rights reserved.
Unlike investing in the stock market, not nearly as many people invest in real estate (beyond the home in which they live). Some of the reasons for this and less than stellar returns among some who do invest in real estate are caused by misconceptions. Here are the common misperceptions followed by why they're wrong:
You need to be wealthy. Although it's true that you need money to play in the game of investing real estate (to make a down payment), you don't need millions or even hundreds of thousands of dollars to get started. A five-figure ($10,000+) savings balance provides a point of entry into good investment properties.
You need to be a high-income earner. So often the news reports about the Donald Trumps and other big income earners as the ones making big bucks investing in real estate. But, there's no reason that you need a million-dollar plus income to invest successfully in property. You don't even need a $100,000+ income. Plenty of folks began investing in real estate while earning modest wages or salaries.
You need to have connections and know the right people. For sure you should have a team of competent real estate industry professionals, contractors, and suppliers, but anyone can assemble such a squad. Armed with the knowledge in the latest edition of Real Estate Investing For Dummies, you have a huge head start in the race to screen and find the best folks to hire to help you with your transactions and operating your property.
You need to be lucky to make big money. A little bit of luck is always welcome of course, but the key to making money with real estate investing is to do your homework and find the right property in the right location. You can then acquire that property at a fair price and successfully manage all of your properties well over time.
It doesn't matter whom you rent your property to as long as you keep the property occupied. Real estate investors often overlook or downplay the importance of tenant selection. Properly preparing the property to attract the most qualified prospective tenants and then targeting your advertising to that target market are the first two steps to increasing your odds of finding a qualified tenant who will stay for the long term and treat your property with care and respect and essentially make your mortgage payments for you and build up your equity.
Investing in real estate isn't worth it unless you buy can a large property. False! Many investors started with real estate investing with small, less costly properties. Bigger and more expensive properties typically come many years down the road.
The collapse in real estate prices before and during the 2008 financial crisis shows that real estate isn't a good investment. Real estate, like stocks, and other ownership type investments, goes through cycles. But, if you do your homework and buy solid properties at fair prices and manage them well over time, you should do well. Also, keep in mind that different types of properties in various locations don't all move in lockstep.
The best way to make money in real estate is to buy and flip properties, especially if you can renovate them. Holding a property for a relatively short period of time ensures that your transaction costs of buying and then selling will consume a large portion or even all of your profits. Also, your profits may end up being taxed at higher tax rates for shorter holding periods.
You should always buy small properties and just add to your holdings and continue to manage these multiple rentals at various scattered locations. Acquiring small properties to begin your real estate investing career certainly makes sense, and you can do quite well even over many years. But at some point you want to seriously look at selling some of the smaller properties and consolidating your real estate holdings into larger properties that offer more economies of scale and take the equity you have built up over time in the small properties and have medium to larger properties that you can manage. Or you can hire professional management if you really want to avoid the day-to-day headaches often associated with tenants, toilets, and trash.
After you own several properties, you can enjoy sitting back while the profits roll in. Wrong! Managing rental properties and doing it well takes time and resourcefulness. There are no shortcuts, especially if you want to avoid unpleasant surprises and make the most of your properties.