Drawbacks of Investing in Real Estate
Despite the positives noted in our previous post, there are a few drawbacks to be aware of before investing in real estate. They are noted below.
Real Estate Requires Your Time:
Investing in real estate requires a significant amount of time. You will need to spend time learning about the neighborhoods in which you want to invest, identifying problems with prospective investment opportunities, and dealing with maintenance issues. It is possible to hire a property manager to deal with tenants, but dealing with the property manager will still require a certain amount of time.
Huge Transaction Cost:
Buying and selling properties is a costly affair. The transaction cost, including registry charges, legal expenses, diversion, etc. are so high that the cost of investment increases for the buyer.
Real Estate Requires Maintenance
There may be times when unexpected maintenance issues arise, such as a failed water heater or a leaky roof. The associated repair or replacement costs may be substantial and could wipe out your cash reserves. This can come as a particular surprise when the home inspection on a recently acquired property did not spot the issue.
No Fixed Maturity:
Real estate appraisal does not take place at a fixed rate in a defined period. Capital appreciation in the case of properties is a long-term process; it is though presumed but not pre-defined.
Real Estate Creates Liabilities
Real estate investing involves taking on a great deal of financial and legal liability.
All the drawbacks mentioned above add to the liability a real estate investor takes on when purchasing, financing, rehabbing, leasing, managing, and maintaining a property. Even though investment properties may be in a corporation, there are often personal guarantees associated with the business and the risk of losing the income and profits generated by the company.
Reasons for Failure in Real Estate Investing
Why Do Real Estate Investors Fail? Investing in real estate is one of the best methods for making money and accumulating wealth. It is a fairly easy business to get into, and you can start with no to very little money.
Following are some of the primary reasons for which the real estate investing goes wrong:
Real estate is usually started as a side business while keeping another job. However, many investors fail to treat it as a business and dedicate allotted time each day to learn and implement.
Lack of Knowledge:
Before investing in real estate, one must have ample knowledge and information about the project he or she is planning to spend in. Most of the investors fail to analyze the right time of investment or potential of the property and are unable to generate good returns on their sum.
Panicking and Quitting Too Soon:
When you’re investing large sums of money in a volatile market, it may be tempting to sell the property and cut your losses. However, those who panic over not making money in a few months and give up could lose out. Always looking for the next big thing instead of waiting for the market to change can lead to many problems. Wise real estate investors normally play the long game instead of trying to make money in a couple of weeks.
Buying a suitable property or real estate project as an investment is an art. But the investor needs to equally pay attention to the management and maintenance of that property, contractors, budget, and tenants. In the case of real estate which is poorly managed, the returns may deplete.
Tips for Investing in Real Estate
We all know that investing in real estate is better and safer than investing in the stock market.
Real estate is a great investment option for those who want to achieve financial success. Becoming a successful real estate investor is a great step toward achieving that much desired financial freedom.
Therefore, the following tips will help you in making real estate investments even with minimal capital:
Real estate investing can be compared to investing in a dividend-paying stock. The return on investment is based on how cheap you bought the commodity. However, you have to look at the return on the investment. A cheap little house in an unsafe neighborhood can be bought for little money, but you won’t get much money from it, either. So, instead of focusing on buying a house, focus instead on buying land or an off-plan. You buy cheap, save money and gain more as the year goes by.
Diversify your investments
“It’s commonly preached that the best real estate investment is the one in your backyard. While there is merit to
understanding the area in which you’re investing, I believe that you’re truly limiting your profitability potential by only considering a small geographic area.
By considering investments in other states and cities you’ll have a large pool of available investments and ultimately better opportunities. Investing across a large geographical area also further diversifies your investments and protects your portfolio against the volatility of local markets.”
Location of the Property
People are usually looking for real estate which is well managed and sounds appealing to them. However, one must focus on the site of the property more, instead of its appearance. An old ugly looking property at a prime location can be availed at a reasonable price and renovated or reconstructed to generate high returns.