There is no shortage of real estate advice online. While a lot of it "has good bones" as they say, there is also quite a bit that could lead folks astray or simply doesn't apply in our area.
Read on for 5 Real Estate Investing Myths we've run into.
1. It's all about the cash flow.
When people think about investing, owning rental properties, and their potential returns, they typically think of cash flow. Cash flow is the amount you can make on your rental above and beyond your monthly expenditures. But cash flow is really just a drop in the bucket when compared to the total returns.
Cash flow is great but it can make sense to invest even if your investment isn't cash flowing on a monthly basis. How could this be possible?
Because the other ways you get returns on your investment dwarf the cash flow numbers. Annual appreciation of the property, principal buy down (the amount the renter helps you buy down your mortgage), and tax incentives make the cash flow numbers look small. Over the long run, these other metrics are going to make a much larger difference than the monthly cash flow numbers.
Takeaway: Investors make most of their returns in appreciation and principal buy down, not cash flow. Investors should look at the investment as a whole, not just at monthly cash flow numbers.
2. Buying a Fixer Upper is a Good Way to Make Money and Build Equity.
Don't let HGTV fool ya. Flipping homes or putting in sweat equity isn't the best way to realize the best returns in our area. Yes, it's true that many folks have made a lot of money while buying fixer uppers in the last couple years, but they were mostly being carried upwards by the market. All homes appreciated a substantial amount, whether or not they were fixed up.
Homeowners can expect 75-80% returns on money invested into a remodel. This is because the cost of doing remodels is high and the cost of goods is high. Homeowners should do remodels because they expect to be in their home for a long time and because they love it and want to improve the live-ability. Homeowners should not do large remodels to make money unless they are a contractor or can get contracting work done and supplies at a large discount.
Takeaway: Doing remodels won't be the best use of most people's resources. Investors should look for homes in which most of the projects have been done or consider new construction. Big remodel projects make sense for people who plan to live in their home for a long time and want to improve the live-ability.
3. When Investing, Buy Cheaper Properties.
It can definitely be tempting for homeowners and investors alike- when the market is hot, buyer demand is high, and prices are high too, it can be tempting for folks to settle, get the house that needs too much work, or the one that backs to a busy street. The price could be lower and buyer demand for those homes is lower, too. However, that is a trap we advise against. Settling for a home that has issues will typically cause headaches in the long run in the form of homeowner dissatisfaction, higher renter turnover, lower renter quality and more. These homes get sold more often because homeowners get tired of these issues.
Takeaway: Nicer homes in nicer neighborhoods away from road and train noise will be better investments over time. Renter quality will be better, renter turn-over will be less, and if you ever end up living in your investment property you will enjoy it a lot more!
4. You have to get a "great deal" by getting a home at a discount.
Many investors get sidetracked by trying to find the perfect deal. The reality is the real estate market is imperfect and there is always going to be something that will make a deal, well... less than ideal. Trying to time the market so that interest rates are low, you have found the perfect house, and there isn't buyer competition is an exercise in frustration. It's more about getting in the game rather than waiting for the game to be perfect to play.
Takeaway: It's all about getting in the game rather than finding the perfect deal. Starting to invest is most of the battle. When investing, find a property that meets most of your needs and if there are issues, see if they can be alleviated in some way.
5. Real estate investing will allow you to quit your job quickly.
Owning one or two rental properties won't allow you to quit your job now. As with any type of investing, it's a long term play. Slow and steady progress, patience, and focusing on the long term goals will pay off though and after several years, the return on those one or two rental properties will look really good. Take it to the next level and turn those one or two rental properties into more and at that point the impact can be really compelling.
Takeaway: Real estate investing is a slow and steady build, just like any investment. Take it one step at a time, keep at it, and over time it can be life changing.
Want to know more about investing, how to get started, and how we analyze investments for our clients? Don't hesitate to reach out.