Why You Shouldn't Invest in Real Estate
In my last blog post I shared a number of reasons as to why I think investing in real estate is better, in my opinion, than investing in stocks. While you can probably tell from that post and many of my other initial posts, I'm a big fan of investing in real estate. Something I've learned over the years of doing so, and in conversations about what I do, I've come to understand that real estate investing isn't the best for everyone. There are plenty of drawbacks to being the style of investor that I am, and I'm going to shed as much light as I can on those points today.
Real Estate is Not a Get Rich Quick Investment
Buying real estate is a get-rich-slow lifestyle. You can make great cashflow with a property, but unless you purchased a property with 100% cash, you're going to find that a decent amount of the money that you make in a month is generally earmarked for another purpose. Whether that purpose is to pay the mortgage on the property, or it should be sent to a reserve fund in case of a large repair, or even to just go in the bank in case there is a period of time that you don't have tenants, there's just not as much money flowing straight into your pockets as some might expect. As a real world example, our property South Pine Street, currently makes $4,250 a month! That's right around the median household income of an American family!! From that amount, I have to send payments for the mortgage ($2,800), electricity for the common areas, ($10), lawn care and landscaping ($100), hold back money for vacancies ($340), CapEx ($215), and repairs ($215). At the end of the day, that's monthly expenses of $3,680! Our real take home each month quickly dwindles down to $570. Now that's still real money, but that's far from the amazing $4,250 a month that we originally received. If I didn't manage the property myself, I would also cost myself another $425 in property management fees bringing myself to just over break even.
Real Estate is a Large Time Commitment
I've spent a lot of time over the past few years trying to automate as much as I can with our property. It definitely felt like a second full time job when I first started, and that's something that I don't know if I was ready for. I had read that it could be time consuming, but I don't think I realized that there would be weekends spent fixing problems, or that there would be sleepless nights worrying about problem tenants, or that I would have to come home after eight or nine hours at work to then spend another three hours addressing another problem that had come up. I personally think that all of the time spent was worth it, and now has me in a place where I can confidently run our property from across the country, but if you're looking for a hands-off investment, you're better off avoiding real estate all together!
Real Estate isn't Cheap
If there's one thing that I've learned, since buying our first property in 2015, it's that getting enough money to buy our second property is probably the hardest time I'll have with funding. Our first property was purchased with an HFA loan that only required 3.5% down. This is great, as it was a way to get ourselves into real estate without needing too much financial backing. Now, as we look for our second investment, we need to come up with 20-25% down, as well as have reserves that meet our lender's requirements. While I definitely think that putting money down to have skin in the game makes sense, it certainly makes getting our next property pretty expensive!
Real Estate Requires You to Wear Many Hats
I strongly believe that the reason I have been able to find success in real estate is because I have strong interpersonal skills, I am handy enough to know how to fix things, and I have an above average set of business minded skills. To me, this is an integral part of being a successful real estate investor. That's not to say that if you're lacking in one area that you can't find someone else to partner with to make up for it. This just means that without the combination of capabilities, you might find yourself in for a rough time. A saying I hear a lot from others, when talking about being a landlord, is that it must be so hard to deal with tenants. I have certainly had difficult conversations with tenants, but it's the ability to have that conversation and not let it ruin your entire week which is necessary to have. There are plenty of businesses or paths with investing that only require one really solid skill that you can capitalize on, but real estate definitely isn't one of them.
Most People Wont Understand What You're Going Through
Tenants hate me - I honestly do everything that I can to make sure that my tenants have the best living situations that I can provide. I still deal with complaints from my tenants about other tenants, or about small details not being perfect for what they expect, or any other number of things. To them, I may always be the rich land-owner who just sees them as dollar signs, and while I don't think this is true personally, I've just had to accept that.
Friends and family think I'm crazy - They didn't understand why we would want to purchase an investment property in the first place. I had family actively fight my position on getting into real estate, and I had to push back and smile at them while doing something that I believed in. Mrs Money Smith wasn't even on board initially - but this was something that we were able to work through. Now, as I continue to do fine in this space, my friends and family have swung to the other end of the spectrum and inquire about my plans all the time, but that initial struggle of feeling like you must not have the right plan is challenging. I'm glad I stuck to it though, which can't be said for everyone.
Everyone Has an Opinion on Your Actions
Similar to friends and family thinking we're crazy, they also have strong opinions on why I should or shouldn't operate in the way that I do. This is something that I've learned to entertain as sometimes there are good ideas that come out of conversations about real estate. Often times, I disagree with the thoughts of others on the topic, but I can generally find the reason to be that they just don't understand real estate investing. I love using these conversations as a learning opportunity for anyone who will listen, but being open about what it is that we do can make you second guess yourself constantly if you're not prepared for everyone's interjections.
Real Estate Takes a Ton of Education
I studied real estate investing for almost three straight years before we bought our first property. That three years consisted of a lot of reading, and a lot of speculation on what could happen vs what should happen. There's so many ways to invest in real estate that it can become a dark hole that's so easy to get lost in which is why so many people never even start. Even deciding to just become a real estate agent requires significant amounts of education and time. I've also accepted that I'll never know everything there is to know, even about my specific niche in real estate. I am constantly learning new ways to accomplish tasks and new methods for getting to where I need to be, and I don't think that will ever stop. This point is similar to the second one I mentioned, as real estate is just such a gigantic time commitment.
Finding a Deal that Makes Sense Can Feel Impossible
In real estate, you make your money on the purchase side of a property. The challenge with that is the fact that properties that are a good deal don't stick around for very long. Hell - they don't even come up very often, and when they do they disappear almost instantly. I know for a fact that if I have the money to purchase an investment property, and I know the market that I'm interested in, then there are at least five other people in the exact situation I am that are ready to pounce on a good deal. This is where the real grind comes into play, and I haven't really talked about this in previous blog posts. But the real time and energy drain is when it comes to actually buying a property, there's everything from searching for a market that makes sense, to the due diligence after an offer, to even handling your relationship with your realtor. There's not a lot that you can do for yourself, other than just stick through the process and hope that you come out on the right side when all is said and done, and that in itself is very hard.
There are definitely other reasons not to invest in real estate, but that list could likely go on forever. This post was mainly to show that, while I will normally advocate for making real estate a large part of your personal portfolio in my blog, the decision to do so definitely isn't for everyone. Real estate isn't and will never be the only type of investment that we make, but it will certainly continue to be one of the largest parts of our portfolio. While I want to use this blog to educate others on ways to find financial independence, I will also do my best to represent both sides of each coin.
Thoughts? Do you have any big reasons not to invest in real estate that I missed? Have you looked into real estate and considered all the options to realize that it wasn't just for you? I'd love to hear about your experiences!