Before you jump straight into the comments to tell me why [insert real estate youtuber here] is right and I’m wrong about this, let me start by saying that I’m not against investing in real estate. For many people, with the right strategy, it can be a fantastic way to generate wealth and income. That being said, it’s not for everyone, and you may want to consider some of these points before you decide to dive into this asset class.
It’s Complicated
Don’t get me wrong, complexity is not a good reason to avoid doing something. Most things worth doing are difficult. However, there’s a reason so many real estate investors out there are also real estate agents–it takes a deep understanding of the market to be successful. Real estate agents have chosen this as their career, and in states that require it, have become licensed to do so. They are professionals. Anyone who has purchased a home can tell you–it’s no walk in the park. After the hours, days, weeks, and months of searching for the right property, you then have to deal with paperwork, financing, inspections, more inspections, and some back-and-forth with the seller. A good real estate agent will make this process easier, for sure, but jumping into real estate without that expertise is foolish. It’s not an easy thing to do consistently unless you dedicate yourself to it.
It Has a High Barrier to Entry
The saying “you have to spend money to make money” applies to real estate in a big way. Even if you’ve bought into the idea that a 3.5% down payment is the way to go (and who am I to tell you otherwise?) it takes more money than that to get financing. Banks will want to make sure you’re not blowing your entire wad on the down payment, and will require that you have cash or asset reserves in addition to the down payment. It’s a good idea to have several months savings anyway, but if you were thinking you’d scrounge up the down payment and dump all of your savings, think again. More traditional financing will require in the neighborhood of 20% for a down payment. Even if you’re lucky enough to live somewhere with reasonable real estate prices (unlike me), you’re still looking at tens of thousands to six figures for a down payment, plus cash reserves. Oh, and don’t forget closing costs–those can add up too.
You’ll Become a Landlord
Some of you may say “duh” to this one, but being a landlord comes with many responsibilities that you may not be aware of. Suddenly, you’re responsible for the upkeep and maintenance of one or several properties, you have to find quality tenants, evict bad ones when they don’t pay, and do it all by the book. Yes, you can hire people to do all of this for you, but if you’re not willing to do these things yourself or simply don’t have the time to, you’ll be hurting your cash flow. Hiring a professional may be the right thing to do, but many beginners don’t account for these expenses, or the difficulty involved. Risk = reward, but if this doesn’t sound like your cup of tea, you may want to reconsider a venture into this world.
In Conclusion
The goal of this article isn’t to be negative, or to rule out an entire industry. There are many reasons to jump into real estate despite these challenges. If you read the above points and weren’t dissuaded, then congratulations, you might just have what it takes to start investing in real estate. If not, don’t worry–there are many avenues to generate income and wealth. Happy investing!
