Addressing 10 Common Real Estate Investing Misconceptions

By Eric Tyson, Ray Brown

Copyright © 2016 Eric Tyson and Ray Brown. All rights reserved.

Buying a home is most people’s first foray into the world of real estate. However, real estate can also be a good place to invest your money and see a profit. More people invest in the stock market than invest in real estate (beyond the home in which they live). Some reasons for this are due to misconceptions. These misconceptions also cause some investors to see less-than-stellar returns on their real estate investments.

Here are common real estate misconceptions followed by why they are wrong:

  • You need to be wealthy. Although it’s true that you need money to play the game of investing in real estate (for 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 in the news we hear about the Donald Trumps and other big-income earners as the ones making big bucks investing in real estate. But there’s no reason you need a million-dollar-plus income to invest successfully in property. You don’t even need a $100,000+ income. Many folks begin investing in real estate while earning modest wages or salaries.

  • You need to have connections and know the “right” people. You should certainly have a team of competent real estate professionals and contractors and suppliers, but anyone can assemble such a squad.

  • 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. Find the right property in the right location, acquire that property at a fair price, and successfully manage all of your properties well over time.

  • It doesn’t matter who 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. You want to look for tenants who will stay for the long term, treat your property with care and respect, and essentially make your mortgage payments for you and build up your equity.

  • It’s not worth investing in real estate unless you buy can a large property. False! Most people who invest in real estate get started 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 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 earn solid returns. Also, keep in mind that values of 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.

  • Once 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.

  • You should always buy small properties to add to your holdings and continue to manage these multiple rentals. Acquiring small properties to begin your real estate investing career certainly makes sense, and you can do quite well over many years. But at some point, you should seriously consider selling some of the smaller properties and consolidating your real estate holdings into larger properties.

    Take the equity you have built up over time in the small properties and use it to purchase medium to larger properties. By selling several smaller properties and buying a larger one, you can take advantage of the economies of scale that a larger property offers. With larger properties, either you can manage them or you can hire professional management if you want to avoid the day-to-day headaches often associated with tenants, maintenance, and upkeep.