Granbury Real Estate
Problems with Real Estate Investments That Should Be Avoided
The five main problems with real estate investing as a lot of people understand it, are these:
Problem #1:
The landlord trap
For everyone who acquires a couple properties, there's a point when they tend to fall in the "landlord trap." This is when the investor is so busy managing and maintaining what he has already got, that he doesn't have the time to get out purchase more homes.
A solution for this is by outsourcing the property management, and although this is a perfect solution for some people you've got to be mindful of the substantial accumulated cost that comes with it. Other inventive solutions exist for a beginner, which include negotiation techniques that see the tenant happy to be responsible for all repairs.
Problem #2:
The Do it Yourself rehab trap
Several people think that the way to success in real estate investments is to buy properties, fix them up, then flip them for profits. Even though that is one of several viable game plans, very few understand that does not mean you are required to do the rehab work all by yourself.
A secret to success in real estate is leverage. Until you leverage your time by hiring other people for any improvement or rehab work you'll be severely restricted in your real estate investing ability. Doing rehabs yourself is a good way to keep your investing business small.
Problem #3:
High risk
Even without thinking about your ROI (which is something you shouldn't ever do in practice), placing a lot of your own funding in a single project means it is a much riskier proposition. An essential concept of stock investing is deciding your position sizes, and the same concept applies with real estate investment planning. The larger your investment in one trade, the more you are vulnerable. If you've put no money down in a venture then surely you can acknowledge that your risk is significantly reduced.
Problem #4:
Negative money flow
A lot of people see compounded appreciation as the actual fortune builder when it comes to real estate investing. The trouble is that to get that gain, the majority of people fund it on a continuing basis with loans. Generally, as you buy more expensive properties, the rent simply doesn't keep pace with the property payments which means it is extremely hard to create positive cash flows. And for investors who try to lower the down payment like we mentioned earlier, the dilemma is worsened by having higher loan payments.
In the past, to have the big payoff in the end you had no choice but to cover the negative money flow, however it doesn't have to be that way. There are many ingenious real estate investment techniques that let you remain cash flow positive and also enjoy the rewards of appreciation.
Problem #5:
Large down payment
Typically the biggest hindrance to those getting started in real estate, either as a homeowner or investor, is the down payment. 20-30% down isn't uncommon, and aside from the problem for a lot of people in raising this extra money, it also means that the profit from your investment will be significantly less. If you are able to get into a deal that has 5% or lower down, your ROI will soar through the roof (so long as it's still a profitable deal).