Troubles with Real Estate Investments That You Should Avoid
The 5 biggest problems with beginning real estate investing as the majority of people understand it, are these:
Problem #1:
Large down payment
Generally the biggest barrier to those getting started on the real estate ladder, whether as an investor or homeowner, is the down payment. 20-30% down isn't uncommon, and aside from the hurdle for many people in raising this cash, it means that the return from your investment will be considerably lower. If you can get into a deal with 5% or less for a down payment, your ROI shoots through the ceiling (so long as it's still a favorable deal).
Problem #2:
Negative cash flow
A lot of investors see compounded appreciation as the actual wealth builder when it comes to real estate investment analysis. The complication is to get that increase, most people are funding it on a continuing basis with negative cash flow. Normally, when you invest in more costly properties, the rent simply doesn't keep pace with the home values which means it's extremely difficult to make positive cash flow. And for those that try to minimize their down payment as we suggested above, the dilemma grows because of the bigger loan repayments.
Previously, to have the big payoff in the end you had little choice but to fork out the negative monthly money flow, however it is no longer that way. There are inventive investing methods that will allow you to enjoy the privileges of appreciation and also remain cash flow positive.
Problem #3:
High risk
Even without considering the return on investment (which is something you should never do in practice), having a lot of your money in one project makes it a risky venture. An essential principle for investing in stocks is figuring out your position sizes, and that principle also is essential to real estate investing. The greater the investment in a single transaction, the more you're at risk. If you've got nothing down in a venture then it should be obvious that your risk is significantly reduced.
Problem #4:
The landlord trap
For every investor that acquires a couple homes, there is a point at which he tends to get into the "landlord trap." At this point the investor is so overloaded managing and keeping up what he has already got, that he doesn't have the time to look for and find any more homes.
A solution to this is by outsourcing the property management, and while this is a good solution in some cases you've got to calculate the significant increased price that comes with it. Some clever answers can be used by a beginning investor, which consist of negotiation methods that see the leaseholder satisfied to be responsible for the repair and maintenance.
Problem #5:
The DIY rehab trap
A lot of new investors believe the highway to success in real estate investing is to buy properties, repair them, then sell them at a higher price. Even though that is one of several practical game plans, very few understand that does not mean you must do the repairs all by yourself.
A key to success in real estate is leverage. unless you leverage time by hiring contractors for the renovation or rehab work you'll be greatly confined in your investing potential. Doing the work yourself is a sure way to keep your investing business small.
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