Debunking 8 Real Estate Investing Myths
Real estate investing offers a wealth of potential – both literally and figuratively. Successful investors can see the potential in properties and maximize the opportunities available to turn a profit.
Compared to other forms of investing, real estate has a steeper learning curve. The capital required to invest is higher than some of the easier alternatives, meaning that investors need to have an educated strategy and a concrete game plan before taking the plunge. However, some of the common myths surrounding real estate investments can lead newcomers to the field astray. Believing in myths can complicate the process, resulting in an excessive investment, misconceptions about certain investment pathways, or poor management of properties.
By knowing common myths and the truths behind them, investors can approach their next real estate purchase with confidence, and turn your real estate investment into lucrative, on-going ROI.
Myth #1: The Best Contractor Is the Most Expensive Contractor
Contractors are available in a wide range of price points based on location, skill, relationships with suppliers, and many other factors. As such, investors need to carefully weigh their choices to ensure they’re choosing a talented contractor at a price ideal for their budget. However, it can be relatively easy to overpay.
It is true that the cheapest contractor out there may be cutting corners to keep costs low and may therefore be a poor choice, but the inverse isn’t necessarily the case. The most expensive contractor may not be the most skilled professional on the market, resulting in high costs for substandard service. Alternately, some contractors may charge a premium for services a property does not need, making the benefits of a pricier choice negligible.
Instead of assuming the costliest option is by default the best, get quotes from a variety of companies, ask to see samples of prior jobs, inquire about areas of expertise, and speak to past customers. You want to choose the best possible contractor for your specific project – not the flashiest name.
Myth #2: Rental Homes Are Bad Investments Because Tenants Can’t Be Trusted
Renting properties is one common form of investment. Tenants come with the territory of rental homes by definition. After all, without tenants, there’s no rental income. However, for some investors, tenants make the prospect of renting out property daunting.
Tenants can be a liability due to the unknowns in renting to a stranger, and some renters do cause problems, like property damage or failure to pay rent. The worst tenants can even result in costly eviction lawsuits. Luckily, this kind of nightmare tenant is fairly rare. Most tenants are polite, kind, and willing to care for your property, providing a nice ROI with minimal risk.
To reduce your chance of renting to a bad tenant, make due diligence a part of the rental process. Perform credit and background checks and ask for references. If tenants have mistreated other landlords in the past, you’ll know about it before handing over the keys.
Myth #3: Landlords Don’t Care About Tenants
Some landlords are distrustful of tenants, but the reverse can be true, too. Many tenants believe that landlords don’t have their best interests at heart, or only care about making money. However, good landlords know that caring about tenants is part of being a successful real estate investor.
Things like ensuring a property is in good repair, making regular upgrades and renovations, and being polite and responsive can play a big role in keeping renters happy and rent checks coming on time. Happy tenants will talk to their friends and leave positive reviews, which boosts competitiveness in the marketplace. A good reputation makes it much less likely that rental units will sit vacant – and opens the door to charging a premium for a luxury living experience.
Myth #4: An LLC Provides Unilateral Protection When Buying Property
An LLC, or limited liability company, is a popular way to structure a real estate investment venture. As a legal entity separate from the individual investor, using an LLC is a good way to keep personal and business assets separate and to safeguard business operations.
The name, however, is often misinterpreted. Using an LLC can limit personal liability, but it doesn’t universally absolve the LLC owner from any and all liability. If an LLC facilitates something illegal – like breaking construction-related laws, failing to secure proper permits, or violating landlord-tenant laws – the ramifications can absolutely come back on the LLC owner. LLCs can be a valuable tool, and something many real estate investors may want to consider using, but LLC protections aren’t universal. When purchasing property, it’s important to follow all local and state laws as well as perform all normal due diligence.
Myth #5: The Real Estate Market is Predictable
Investors, particularly those who are newer to real estate investing, may be inclined to think that the market is predictable: that some years are good, some years are bad, and market downturns happen around every eight years. Investors may be tempted to try to plan future strategies around this kind of assumption, but that can be a dangerous idea.
In reality, the market is anything but predictable. While the market has seen some pockets of downside on a semi-regular basis in the last several decades, this is largely coincidence – not a pattern of any significance. As seasoned investors know, there’s no way to predict with any real confidence what the market will be doing a year from now, let alone eight.
Before making any moves, investors are highly encouraged to do their research, including evaluating the current state of the market and analyst predictions for the near future. Banking on something significant happening, like a strong market correction, is only appropriate if the facts and figures support such a conclusion – not when using coincidental patterns and nothing more.
Myth #6: Only Rich People Can Invest in Real Estate
Real estate is often expensive – a fact that has contributed to the perception that only rich people can participate. In reality, anyone with excess cash and a little dedication can make real estate into a beneficial investment and a part of a diverse portfolio.
First, hundreds of thousands of dollars in liquid assets aren’t required to buy an investment property. Many real estate investors, especially those just starting out, use loans (by Westpark Loans!) to purchase properties, similar to buying personal property with a mortgage.
Second, there are numerous ways to invest in real estate. Fixing and flipping and purchasing rental properties are popular options.
Myth #7: Flipping a Property Guarantees Profits
TV shows make property flipping seem fast, fun, and, most importantly, simple. Professional flippers on countless HGTV programs show investors purchasing seemingly random properties, making a few tweaks, and turning substantial profits.
However, life isn’t the same as television. While it’s certainly possible to generate a great ROI on fix and flip properties, it’s not guaranteed. The wrong investment can lose money instead.
As with all forms of real estate investment, significant strategy is required to successfully fix and flip properties. Investors need to approach a purchase with an idea of what kinds of repairs are needed, what those repairs cost, and what kind of post-renovation price is appropriate based on location and the current economy. If done correctly, however, fixing and flipping homes can lead to lucrative returns.
Myth #8: It’s Best to Cut Corners Wherever Possible During Renovations
Renovations are a large part of most real estate investments, whether fixing a property to flip or preparing it for tenants. Saving as much money as possible is paramount – but that doesn’t mean that cutting corners is acceptable.
When renovating a property, it’s best to do the job right. Yes, cutting corners and going with quick fixes rather than real repairs can reduce the cost of upgrades, but shoddy work won’t go unnoticed. Many renters and buyers are hesitant about moving into a property that doesn’t meet expectations, as most know that poorly done repairs will likely need to be redone at a higher price point in the near future.
In some circumstances, it’s okay to go with a less expensive alternative – like refacing cabinets rather than replacing them in full – but this is very circumstantial. When in doubt, trust the advice of contractors or other home renovation professionals.
Real estate investing can be a very beneficial way to augment an existing portfolio and generate active or passive income. With the right strategy, it’s possible to be very successful, no matter your personal purchase preferences. To succeed, it’s critical that investors are able to parse the truths from the myths. Believing any of these ten popular real estate myths can derail the process and stand in the way of very real and lucrative profits with real estate investing.