Real estate investing has historically proven to be a good way to grow wealth but it does have its challenges. Knowing those challenges gives you a realistic view of how real estate investing works and how it can cost you time and money. Limiting risks by understanding them is part of any type of investing.
10 Downsides of Real Estate Investing
Inexperienced investors can get burned on their first real estate investment. It takes many years to understand the details involved with investing in real property.
Real estate is hands-on, unlike other investments where your money grows without your daily input or effort.
Your most valuable asset is your time and managing a rental or fixing up a house can eat away at your free time.
Dealing with renters is one of the top complaints from real estate investors. They can be late on the rent, not pay for the final months, wreck the home, or call you about the tiniest problems, etc.
Expenses can pile up on properties you own. You have to consider taxes, upkeep, and major repairs.
Many real estate investors go into debt to buy properties. This adds risk and stress that is much different than investing just a portion of your paycheck in stocks or mutual funds.
Finding a good deal on a house or multi-unit building is a big challenge, especially in a hot real estate market.
City and county regulations can change from year to year, meaning you could have to upgrade properties or face issues such as longer waits to evict a renter who is not playing by the rules or paying on time.
Rental properties can test your patience and houses you plan to flip can test your DIY abilities. Maintenance and repairs always cost more than you planned, so doing things yourself will save money but can take a toll on you.
Making a nominal profit is not going to be life-changing, especially if home prices went up due to inflation. Ten to fifteen thousand dollars may seem great on one check, but was it worth all the work and hassle involved?
Minimizing Real Estate Risks
Many of those real estate challenges can be minimized with some planning and patience. Those looking for short-term gains may find them, but they rarely last. It’s similar to trying to time the stock market. A slow steady approach keeps goals more realistic and helps avoid the pain of major market shifts, regardless of which market.
Here are some ways to avoid the real estate risks listed above:
Learn on the job by working in a property management company. This gives you a clear view of monthly tasks associated with a property.
Create a time budget to understand if you really have time to invest in real estate and be hands-on with operations and management.
Talk to several property owners to get a clear idea of their schedule and how they deal with renter issues.
Sit down with your spouse and decide if going into debt is part of your financial plan. If even one of you prefers to limit debt, then it may be better to stick with stocks and bonds since you don’t have to borrow money to invest in those.
Finding deals on real estate will always be tough but if you have a strong network of people in the know around town, you will have more luck.
Talk to city officials to learn what they see daily with property owners who are surprised by rules such as zoning, inspections, and permits.
Learn the basics of home repair, not on YouTube, but hands-on with a friend in construction. Volunteering for Habitat for Humanity is another way to learn about construction from experienced volunteers.
Dig into the details of actual expenses and profits, realistic numbers. So you can decide if the risks / hassles are worth the reward.
You can always save yourself time and effort while still investing in real estate with real estate investment trusts (REITs). No need for large sums of money poured into a property with these trusts. No debt and no upkeep of a physical property by you.
Instead of relying on HGTV and other channels highlighting only the positive outcomes of flipping houses for profit, speak to real people. Builders, re-modelers, and house flippers in your county or state will give you the good, bad, and ugly details.
Real Estate Can Be a Good Investment
Even with the challenges of real estate investing and management, it can be a good investment. However, it’s just one piece of the investment puzzle. When combined with assets such as stocks, bonds, and mutual funds you will have a well-rounded portfolio.
As with any investment, there are risks. Knowing what they are and how others deal with those risks helps you protect your savings and grow your wealth over the long haul.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.