10 Real Estate Investing Myths Debunked
With any great venture comes criticism and a host of naysayers due to jealousy or a lack of understanding. Stay educated and watch out for the common myths that people hear once they get started in real estate investing. We’ll show you 10 real estate investing myths debunked to give you a new outlook on the possible. Watching out for these myths will allow to identify and debunk them quickly!
1. Investing in real estate is too risky:
“And the trouble is, if you don’t risk anything, you risk even more.”
– Erica Jong, Fear of Flying
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This one definitely makes me think of various “if I had a nickel” idioms when I hear this one. This is a broad topic that I could probably do an entire post on. It’s a common theme fueled by many horror stories that people hear, especially after the recession. The misconception about real estate is that it’s a gamble, such as betting on black in Roulette. Although there are exceptions, some of the people who lose money in real estate are the same type of people you’ll see bellying up to the Blackjack table. This type of person will throw his/her money at a “hot tip”, a hunch, or a referral from a friend without doing any homework.
Ask this individual what a Comparative Market Analysis (CMA) is. Ask if he/she did any research or got educated on real estate. Continue to probe and find out if he/she ran cash flow, Return on Investment (ROI), or rent calculations to find out if their investment was as lucrative as it sounded on paper. Again, I know savvy, educated real estate investors have been hurt by the recent crash (even the best have a “bad deal” or two), but that is a rare exception and most real estate investors are very successful. You just don’t hear a lot about them because they become gradually successful over time and aren’t “betting the farm.”
It’s true that investing in real estate has some risk, however, where would your money go instead? There really aren’t any risk-free investments out there; even sitting in cash or having your money in a savings account will cause inflation to erode your savings over time. Your 401k and mutual funds follow the stock market, which has been cumulatively flat for almost 15 years. The market obviously didn’t take too well to the housing crash, so that wouldn’t have saved you either!
So, you will have a few bad moves, missteps, foibles, and faux pas, but remember that real estate investing is a learning process with amazing upside potential. What is truly risky? Neglecting to educate yourself on real estate finance and investing. That brings us to #2 below!
2. I don’t have enough education, I’m not intelligent enough
“Risk comes from not knowing what you’re doing.”
– Warren Buffett
This ties in well to the first myth. In a way, what you’re saying is probably true. You probably need more education to really begin investing in real estate. The myth, however, lies in people’s self-deprecating beliefs. Anyone can learn how to invest and manage real estate. It depends on if you have a fixed mindset about your abilities or if you believe you can truly grow into an expert investor. You don’t have to be a math whiz, a financial genius, a jerk, or a handyman. If anything, genius and intelligence make it WORSE for you because investing can be very humbling. You have a lot to learn and if you think you know it all, you don’t. Those who go into investments on a hunch or buy with their ego will soon find themselves in a negative cash flowing position or worse yet, foreclosed upon.
3. You have to be rich to invest in real estate, i.e. I don’t have enough money to invest
I won’t repeat myself. We wrote a whole blog post just on this topic. As Prince said, “You don’t have to be rich…” and the argument that you need a lot of cash is flawed. This is due to ignorance of the concept of using other people’s money. In fact, how do you think the rich real estate people got rich in the first place? According to the Millionaire Next Door, 80% of millionaires interviewed are first-generation affluent. They weren’t born with money.
We highly recommend reading the book Millionaire Next Door. It has helped me, the other founders of our company, and countless other investors. Get your copy HERE.
4. I don’t have enough time, real estate investing takes too long
Most people say they don’t have time to be investing in real estate, i.e. finding deals, managing properties, and fixing toilets.
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Check out Value Your Time: Start Making $100/hr Investing in Real Estate and really think about if you “have the time” to kick your financial butt into high gear!
5. There aren’t any deals out there, I missed the recovery
Although there were more incredible deals during the recession, it doesn’t mean that there are none left. Interest rates are still at remarkable lows, which means money is cheap to get a hold of and that all factors into your cash flow calculations. A lot of housing markets have bounced back, but that is a positive sign. Real estate is a hard asset and people need places to live. Investors who held on to their homes during the recession rode the recovery back up and some kept renting in the process.
6. That late night TV infomercial real estate stuff doesn’t work
“Whether you think you can, or you think you can’t, you’re right.”
– Henry Ford
This one is certainly among the most common out there. Late night infomercials give real estate investing a bad name. They are often filled with promises of no money down, easy money, overnight successes, and get rich quick. It’s not the concepts that are flawed here. What they are telling you is fundamentally true, they just fail to explain how much education, hard work, and discipline is required to have a successful real estate business. I mean, how are they going to sell you this stuff at 2 am if it is “hard work?”
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Besides the way this “late night TV” skews real estate investing and common perceptions, a lot of people criticize investing of all kinds, starting new businesses, or other ventures outside of conventional wisdom to protect their own ego. If this stuff works, then what’s their excuse for not being successful? Remember, a great rule of thumb is never to take financial advice from someone who earns less than you do.
7. My credit is bad
Don’t let bad credit get you down. Sure, it makes it more difficult to get a loan from a bank, but that doesn’t mean it’s impossible to get ahold of cash or fix your credit. Getting out of debt and improving your credit score is a complicated topic, but Dave Ramsey’s Seven Baby Steps are a great way to start. Please remember that Ramsey is more conservative when it comes to money, but you have to walk before you run. If you need a fire under your behind, he will get you back on your feet, but in order to really start taking off in the world of investing, you’ll want to expand your horizons beyond standard mutual funds. That’s where real estate comes in.
As explained a bit in Low Money Down, you can always get private money and hard money. You could also partner with someone who has good credit. You can be a bird dog for people with money and credit who just don’t know how to find good real estate deals. Going back to those late night TV infomercials again, as Investopedia warns, bird dogging isn’t going to make you the next Donald Trump and it takes years to get the experience necessary to find great deals.
8. I can just invest in a REIT and save myself the headache
In an earlier blog post, I talked about REITs and some of the advantages of them. In certain situations, you could benefit from owning some REIT stocks. Without initial education, it would even seem like a passive real estate investment that is hands-free and gives you huge dividends.
Unfortunately, REITs do follow the stock market, so they are not the same as real estate investing. If you want to be a true real estate investor and take advantage of a different asset class (and diversification), you have to look beyond the REIT strategy. REITs can be good; however, don’t mistake them for true real estate investing.
9. I do just fine in the stock market
10. Only institutions or full-time pros make it in real estate
Quite the contrary–most residential real estate investors are amateurs investing in single-family homes, duplexes, and other small and accessible properties. They do this as a retirement plan and supplemental income to their day jobs. They might even fall into the responsibility due to relocating, getting married, or dealing with a loved one’s estate.
You don’t have to be a licensed real estate professional or “certified” to invest in real estate. Great deals are all around you and don’t require a “great deal” of money to get started. Many everyday investors like Brenda Kurtz are succeeding, why shouldn’t you?
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