Real estate is a topic that at once seems familiar and foreign to many people. They might be familiar with the general process, having purchased their own home or knowing someone who rented out an apartment. But the thought of venturing into investing often seems daunting, probably because real estate is a field with a host of fallacies. Everyone knows someone with a story to tell or an opinion to share, but when is it fact and when is it fiction?
The list can get long, but here are 5 popular real estate myths to leave behind:
Real estate is too risky
This may be the most prevalent one. Whether from a well-intentioned uncle or a friend who got “burned,” there’s no shortage of advice about how risky and erratic real estate investing can be.
If you drill down a bit, you’ll find that these objections are typically rooted in the same place: fear. Real estate does involve large sums of money that many people are not accustomed to handling, and that alone can provoke anxiety. It usually involves debt. And it’s an industry with plenty of its own language, which can be intimidating.
And then, of course, there are the market crashes. If you combine these factors and focus only on those, real estate investing can certainly appear too risky.
Then again, there’s risk in everything. The key to mitigating your risk in real estate — as with most anything you’ll embark upon — is to do your due diligence, educate yourself, and be smart with your money.
When you know your market and you know your numbers, you put yourself in an exponentially better position. It’s important to remember that while investors do move quickly, they also move deliberately.
[bctt tweet=”It’s important to remember that while investors do move quickly, they also move deliberately.” username=”ablending”]
Consider this: as one way to mitigate risk, many investors only consider deals with $20,000 or more in expected profit. First, a flip can easily take six months or more, so you need to consider time spent. But risk management is another consideration. Your cushion can help protect you when things go awry, whether it’s an unexpected repair or a global event that affects the market. No one wants to break even, but it’s far less painful than losing tens of thousands of dollars.
Debt is bad
When you head off to college and get the speech about fending off credit card companies, that’s good advice. Unsecured debt can be a bad thing. It could hurt your credit and your ability to purchase your primary residence or a car, among others.
But debt can also be used to your advantage. You can leverage other people’s money (“OPM,” in some circles or hard money lenders) to do a lot more business than you’d ever be able to do on your own.
Debt can also mitigate risk (see myth #1, above). You don’t put your entire savings into a deal, for example; instead, you pony up a portion of the financing by way of a down payment or good faith deposit and borrow the remainder.
Debt is of course a serious matter, and you should learn all you can about it — about how to use it to invest, and about the consequences of different types of debt. Again, education and due diligence are the key to busting this myth.
It isn’t the right time
It doesn’t matter what’s going on right now — someone will tell you it’s the wrong time to invest. And they’re right.
They’re also wrong.
It all comes back to Henry Ford’s famous quote: “Whether you think you can or think you cannot, you’re right.”
Fortunes have been made in market crashes as well as during bull markets. Research, research, research. You can find deals in any market, but you need to know your numbers. It can be harder to find good deals when the market is hot … but they’re still available. It may be more difficult to find buyers when mortgages are tough to get … but the buyers are still out there.
Real estate investing, as with any business, is all about learning and shifting. The investor who learns how to adapt is the one who succeeds.
[bctt tweet=”Real estate investing, as with any business, is all about learning and shifting. The investor who learns how to adapt is the one who succeeds.” username=”ablending”]
Prices always go up
It almost seems silly to mention this one, because didn’t 2008 teach us anything? Mostly, over time, the market does go up — but it’s difficult to say by how much, or when the ebbs and flows will occur.
Real estate is cyclical and difficult to predict, and there will be market corrections. In fact, 2008 can be referred to as a dramatic correction as much as it can be called a “crash” or a bursting bubble.
When you learn your local market and its tendencies, and become really good at estimating repairs, you also become much better at seeing potential problems before they occur or avoiding them altogether.
Wholesaling is easy money
If you’ve been to any real estate seminar, you’ve likely heard a speech from someone who recommended wholesaling — putting a property under contract and then flipping the contract to someone else for a fee — as a great way to get started. It involves low or no money down and you can make thousands in a few weeks — or so the story goes.
In reality, wholesaling is labor-intensive and a specialty unto itself. You need to market for deals, speak to homeowners, negotiate a price, find an end buyer, and be an expert at the numbers.
There’s nothing easy or fast about wholesaling, and many investors will tell you that you do nearly the same amount of work as a rehabber … usually for a lot less money.
Fix and flips = lots of fast cash
On TV, the investor spots a house, buys it within a few days, then rehabs it in a weekend and sells it almost immediately.
In real life? It’s not so fast. Or easy.
While a seasoned investor may be able to purchase a property quickly, that still equates to a week or two at best. And that investor had ready access to cash, relationships built up over time, and a number of deals under their belt.
And any rehab that can be finished in a weekend? It’s not a true rehab. You can probably paint a few rooms in that time, but even that usually isn’t enough. A real value added fix and flip usually involves prep work and permits, among other components.
For most investors, a fix and flip will typically take six to nine months from purchase to resale — sometimes longer, depending on the complexity of the rehab as well as the type of buyer you sell to (government-backed loans are notoriously time-consuming, for example, and can take six weeks to close).
Real estate investing can be a great way to grow a side income or amass wealth. Like anything, it involves a level of expertise and education to succeed. And as with most fields, it also contains any number of myths you need to navigate past. What’s a myth about real estate that you’ve heard and would like to debunk?