All of the Reasons Not To Invest in Real Estate

I know you’ve read about how easy real estate investing is. It’s so trendy right now. I know you want to buy a multi-family home and live in one side and rent out the other. Sure. You want to buy a small apartment complex. Sure. I still don’t understand why anyone thinks these are easy returns.

I am here to tell you that it’s not easy. More people lose their shirt investing in real estate than you will ever know. You have to be an expert in real estate to sustain long-term growth through investment. And even those of us who have been doing it our whole lives still lose on deals.

So stop listening to your friend, who is an agent, and wants to sell you a fixer-upper in an “up and coming” neighborhood. Stop listening to the old-timers who found properties before Zillow was around. Stop listening to your greedy brain that tells you that you just need more. Just stop.

It’s not as easy as you think.

Areas You Need To Be An Expert In

• financial implications of real estate (taxes, 1031 exchange, budgeting, market volatility, rehab costs, mortgages, hard money, private money, property management)
  
• neighborhood dynamics (the ability to spot and identify the trends that will lead prices up or down in a certain area before anyone else does, reliance on “eyeball” information rather than online sources that are six months behind)
  
• acquisition principles (listed properties, off-market acquisition funnel, direct mail opportunities, driving for dollars, approaching default properties, foreclosures, courthouse steps purchases, negotiation tactics for different types of potential sellers, REO strategies, the science of bidding)
  
• people (landlord/tenant relations, dealing with distressed sellers, dealing with heirs after death, working with agents, hiring bird dogs, adjusting on the fly to the unknown)
  
• forecasting (how much will this be worth after rehab, how much will this be worth in five years, how many other properties on this block are likely to be purchased soon, reasonable rent increases over time)
  
• data (date of sale, price of sale, amount of mortgage(s) owed, recent sales in the area, recent sales of similar properties in other areas that have already “come up,” number of cash buys in the area)

These are not even close to all of the things you need to know to win at real estate investing. Don’t listen to your cousin Fred who hit it big once. He probably is underwater on the three properties he bought with his profit from the first one.

These are all of the reasons not to invest in real estate:

You Think Being a Landlord is Easy

If I had a dollar for all the times I told someone how hard it is to be a landlord and they ignored me, and then they called six months later saying it was the worst thing they have ever done, I would be using that money to buy another property.

Being a landlord is the absolute worst. In most states, tenants hold all the cards. Unwitting buyers think they can just kick tenants out whenever they want to. Sorry. Not the case. You would be surprised just how much tenants can do to mess with you if they want to.

And all the while you are holding the bag (the mortgage). And if you make them mad, they may damage your investment and disappear. Fires happen. Water leaks happen. Tenants can be very vindictive when they want to be. Especially if you have been a slumlord.

Never be a slumlord. It gets you nowhere.

Being a landlord is like being a babysitter. Except not only are you responsible for the kids (tenants), but you are responsible for the entire house. Like you come over for the night to watch Jimmy and Erin, but the dishwasher breaks. That’s coming out of your pay. Sounds great, right?

Oh, by the way, you are on call 24/7. When you are a landlord and there is a dishwasher overflow in the middle of the night, you are getting called. When it’s too cold in the winter, you will get called every day. When the refrigerator breaks in the summer, you are getting a call.

I know what you’re thinking. I’ll just get a property management company. Ok, there goes another 8–10% a month to pay for that. And you are still getting a call. Because property management companies can be very hit or miss. And arranging repairs and taking those calls will cost you more.

You can still do it. You can be great at it. But you can’t think it’s going to be easy.

You Want to Invest in a Hot Market

All this means is that you are too late to make the good money. That’s why you need to know all the stuff at the top. If the market is already hot, you can still make money. But not as much as you can if you find the next neighborhood.

Plus you will need more money and be bidding against more people in a hot market. There is no point. You are too late. This is where “investors” always lose money. They buy in too high. They get caught up bidding at an auction. They don’t correctly calculate their rehab costs. They think the market has no top.

Being late to the party in any type of investing is losing because your gains can be greater somewhere else. And your ante will be less. Doing the due diligence to bet on your own research is a long-term capital strategy that can be successful with data and deliberateness.

Sometimes in a hot market, there are soft pockets. An area of a town that hasn’t skyrocketed like the rest. But these spots can be dangerous for an inexperienced investor as well. Everything in real estate is dangerous for an inexperienced investor. So why hedge your bets on an area that is already everyone’s favorite?

When you hear about a hot market, pull up the city on Google Maps. Now look one to two towns in every direction and check what the median sales prices look like there, compared to the hotness. You might just find your next investment area.

You Think You Can Manage Properties in Another State

First, you thought being a landlord was easy and now you want to buy and rent properties in another state because you read about it on Bigger Pockets? How hard can it be? Really hard. Unless you like getting skimmed all the time. You will never know what is really going on with your properties if they are in another state and you’ve outsourced all of your eyes to people you don’t know.

So you live in New York and you buy a property in Oklahoma. You have an agent there who goes by the house to check on it. P.S. — that means he or she never goes by. You need to call plumbers, electricians, roofers in an area where you know no one. So you rely on the Internet because it’s always reliable.

Say goodbye to more of your profit. And your investment. Because when you can’t drive by it yourself, out of sight becomes out of mind and you rely on people you shouldn’t rely on for such a big investment. Are there good property management companies? Yes. Are there very bad ones that will skim from you on your monthly and all repairs? Yes. You better know which one you have.

Out-of-state investing is entirely possible and can be a great portfolio addition, but if it’s going to be your first investment, you need to know the area and have verified eyes and ears there to alert you to anything abnormal.

If you are thinking about out-of-state investing, but know you won’t be a good manager from afar, start thinking about areas you’ve lived or where you have good friends and family who will give you honest feedback and management instead of a stranger. Those might just be your next investment markets.

You Don’t Understand the Importance of a Home Inspection or How to Proceed Without One

Real investors don’t do full home inspections. Because cash buyers move quickly and assume the risk. It’s how you get the best properties. In some areas, you may just do an oil tank sweep for underground tanks and nothing else.

But there are ways to inspect without doing an inspection. And if you don’t understand how important it can be and what you should be looking for, just go out back right now and light your money on fire.

So many things can be wrong with a house that will cost you more money than you ever thought. If you don’t know how to look for yourself, you will not get any properties. The markets are so hot right now, you can’t always be waiting for the inspection to be sure about your new investment. Rehab properties aren’t won by people who want to do a home inspection with multiple contingencies.

There are also several other important non-physical detectors you need to pay attention to in order to protect your future profit margin.

Here’s a list of things you will miss if you don’t know what you are looking for:

• foundation issues (how the house is supported)
• plumbing and sewer issues (do a sewer inspection with a camera)
• asbestos (may require hazardous removal teams)
• oil tanks (old ones can be buried underground and may have leaked causing environmental impact)
• survey (you may not have the exact land acreage you think)
• easements (that driveway of yours may not be all yours)
• old windows (replacing all the windows in a house is not cheap)
• water damage (underneath or associated with water damage is mold)
• roofing (if no one gets on a ladder or can see the inside from the attic, you won’t know much)

This is not even half of the things to look out for. Don’t waive inspection if you don’t know how to identify the things on this list.

So, it’s Impossible to Succeed as a Real Estate Investor?

Absolutely not, but these are warnings for all the noobs out there salivating at what it took most of us years to understand. There are 100 moving parts in every transaction, every rental, every rehab. And if you aren’t on top of all of them, you are letting money escape.

Real estate investment is a numbers game. But it’s also a data game. And a people game. And a marketing game. And a search game. You have to be a professional at them all. When you don’t keep your head in the game, you lose.

This isn’t all of the information you need to know, but it’s a stop sign for those entering into the fray without open eyes. I’ve done it. I’ve made terrible deals. I’ve been crushed by the downturn. I’ve gotten extremely lucky. I’ve been in the right place at the right time. You have to experience it over time and through different market cycles to truly understand how to do it the right way.

Even if you know what you are doing, you might want to just run through this to make sure you have an idea of how all the factors at the top can help you stay ahead of everyone else. Because everyone wants to invest in real estate these days.

But now you know that it’s not as easy as they think.