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Troubles with Conventional Real Estate Investments That Should Be Avoided The five biggest problems with beginning real estate investing as most people understand it, are these: Problem #1: The landlord trap For every investor that has a couple homes, there's a point when they tend to get into the "landlord trap." At this point the investor is so overloaded working on and managing what he already has, that he does not have the time to go and get any more homes. A solution to this is by outsourcing the property management, and although that is a good solution in some cases you have to be mindful of the substantial additional expenses that come with it. Some clever answers can be used by the smaller investor, which involve negotiation methods that see the tenant content to be in charge of any upkeep. Problem #2: The Do it Yourself rehab trap A lot of would-be investors feel that the road to real estate investment success is to invest in properties, fix them up, and then sell them for more money. Even though that is one of many viable strategies, few understand that this doesn't mean you must do the work all by yourself. The key to real estate success is leverage. if you do not leverage time by employing contractors for any repairs you'll be extremely restricted in your real estate investing potential. Doing repairs on your own is a definite way to keep your investing business small. Problem #3: Negative money flow A lot of investors see compounding appreciation as the actual fortune builder when it comes to real estate investment. The trouble is to get that increase, many investors are funding it on an ongoing basis through loans. Usually, if you purchase more costly properties, the rental returns simply do not keep up with the property costs which means it is VERY challenging to have good cash flow. And for people that minimize the down payment as mentioned above, the trouble grows by having larger loan payments. Before, if you wanted to get the large payoff in the end the only choice was to pay the negative cash flow, but it is not that way any more. There are some creative investment methods that will let you enjoy the results of appreciation and also stay cash flow positive. Problem #4: High risk Even if you do not think of your return on investment (which you should never actually do), putting more cash in a single deal makes it a riskier plan. A crucial principle for investing in stocks is deciding your position sizes, and the concept also is essential in real estate investing. The bigger your investment in a single trade, the more exposed you are. If you've put nothing down in a venture then obviously your risk is drastically reduced. Problem #5: Big down payment Often the biggest stumbling block to people getting started up the real estate ladder, either as a homeowner or investor, is getting the money for a down payment. 20-30% down is very common, and apart from the problem for a lot of people in raising the extra cash, it means the return for your investment is drastically lower. If you can find a deal that has 5% or less as a down payment, the return on investment shoots through the roof (so long as it is still a profitable deal). |
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