A great investing opportunity that isn’t great for everyone
Real estate investing is a commonly touted path to wealth. After you buy your first property, you can continue adding properties to your portfolio through leverage. While most people get their properties via 20% down payments, some people secure property ownership with down payments below 5%.
Although real estate investing has helped many people retire, it’s certainly not for everyone. Earlier, I wrote an article sharing the habits you need to become a successful real estate investor.
That article has some hard truths about real estate and provides the foundation you need to become successful with this asset. However, this article will contain some of the downsides of real estate so you can invest accordingly.
You shouldn’t take this article as a dogma or anything like that. You can invest in real estate if it’s for you, but you should know some of the reasons real estate isn’t for everyone. That way, you can weigh the pros and cons rather than exclusively thinking about the end goal and how you’ll get started.
This is the main reason people stay away from real estate investing. Being a landlord is tough, and it’s especially more difficult if you pick the wrong tenants.
Some tenants may become squatters, wreck/neglect your place, and call you every week with random problems. As you build up your real estate portfolio, you’ll get more calls from tenants and have to make more trips in the process.
Real estate turns into a business. Some people embrace the challenge, while others thought they were signing up for passive investing. You can hire a property manager to talk with tenants and handle problems instead, but you have to stay on top of that property manager.
Approaching real estate as a passive investment will create problems later down the road.
A major disadvantage for real estate is the asset’s liquidity problem. Unlike a stock that you can instantly buy or sell, real estate can take years to swap hands. The buyer and seller must find each other, then the sale has to get finalized.
The entire process takes a considerable amount of time, thus giving you less time to respond to the market declining or sudden financial strains (you can use a home equity line of credit for this scenario as you’re looking for a buyer).
It also takes a considerable amount of time to acquire each property in your portfolio. That’s why one of the habits I mentioned in my article is to always search for deals. Finding a good deal is half of the battle. Actually getting the property under your control is the other…especially if you get tangled in a bidding war.
Stocks give you the peace of mind where you can buy and sell them immediately. Real estate does not have that luxury. If you are a buy and hold investor, then the liquidity problem won’t faze you as much, but it’s there.
Real estate prices are on the uptrend due to low mortgage rates. While the low mortgage rates make the leverage feel like free money, ballooning real estate prices makes it more difficult to find solid deals.
This gripe is more focused on current market trends rather than real estate investing as a whole. As long as you get rental properties where the cashflow exceeds the mortgage and other expenses, you’re fine.
However, higher prices make it more difficult to get an ROI from real estate. It’s still very possible, but it’s another reason to stay away from real estate. Some seasoned real estate investors are sitting on the sidelines because they don’t like the current valuations.
Real estate investing becomes more difficult if you want to travel often. You can get a few calls from tenants during your travels and have that stress weigh on your shoulders.
A property manager fixes this problem to a degree, but long distance real estate investing is more difficult than investing in your local area. Some real estate investors buy properties in other states and countries where they believe they can earn a higher ROI, but it takes several years of real estate investing to develop the necessary skills and networking for long distance real estate investing to work out.
If you travel every once in a while, real estate can definitely work. If you want to become a digital nomad, it’s more difficult. If you plan on moving soon, consider if you could manage your existing real estate properties from a distance…or if you would even want to.
Real estate investing certainly isn’t for everyone. There are plenty of merits from buying and selling properties, but it’s important to know some of the downsides before embracing an asset.