Misconceptions in the world of real estate investment are all-too easy to come by.
Some are generated by what we think seems like common sense—it just seems logical, so we don’t stop to think about how it really is—or it comes from years of misinformation being passed around. Whatever the reason, myths have caused many an investor to make big mistakes in the biz.
It’s also stopped some folks from getting started at all!
One of the biggest barriers to getting started in real estate investment is money. Money is, for many of us, a big motivator for getting involved in investing in the first place. We’re dreaming of leaving our desk jobs for financial freedom, or trying to build up a strong retirement and secure a financial future for our children.
For whatever reason, money tends to play an important role. So there’s no surprise that there are quite a few misconceptions about money’s role in investing. We’re here to address a few:
6 Real Estate Investment Money Myths, Busted!
Myth #1: I need a lot of money before I can start investing.
Truth: You really don’t; and there are creative ways to finance.
Thinking about buying a property, taking out a second mortgage...it can be intimidating. You may think you need a lot of extra money that you just don’t have. Investing isn’t like home ownership, however. You’re generating the passive income that will eventually pay for the cost of the property over time.
On top of that, you can always go in with partners, private money lenders, and take other alternative financing routes that you don’t have on the table as a homeowner. Yes, there is cost involved and it’s wise to have money to cover contingencies, but you don’t have to be rich to start. If college students can do this, you can.
Myth#2: No matter what, I’m going to lose money in the beginning. Real estate is just too risky.
Truth: It’s a calculated risk that education mitigates.
Yes, there’s risk to real estate. But real estate, unlike stocks or gold prices, is well within your control. You’re not blindly hoping things will go well and hoping for a good year.
Yes, some things aren’t in your control. But you have active agency in your investments, where they are, and the decisions you make. What if you make the wrong decisions? That’s part of it! The more you learn and educate yourself, the more you’re equipped to take that calculated risk.
Even beginners aren’t automatically guaranteed to lose money if they do their homework.
Myth #3: I have to have good credit to invest in real estate.
Truth: Alternative financing options means you don’t.
Again, alternative financing means you don’t have to depend on getting a bank loan to secure an investment property. Borrowing hard money from private lenders, partnering with investors who do have good credit, getting involved with a crowdfunding platform...there are plenty of options out there for investors struggling with bad credit and limited resources.
You can still invest while you work to restore your credit to good standing.
Myth #4: I should focus on getting the cheapest properties I can find. Good deals are everything!
Truth: Other factors are more important in the making of a good rental property than cost.
Cheapo properties can be a good deal, but they can also be a nightmare. The problem with cheap properties is usually, well—they come with a lot of hidden problems that you’ll have to fix. Bottom of the barrel properties may have good bones, but the work you’ll have to do to not only get them looking presentable, but to fix the major issues that these kinds of properties are bound to have? They’re something that will end up costing you in time and money, while potentially increasing your vacancy time, too.
And if the location and quality isn’t good on top of it, chances are you won’t be able to charge a whole lot in rent. Cheap isn’t always better for your cash flow! In the long run, you’re not really doing yourself any favors buying cheap and dumpy.
Myth #5: There’s less money to be made in a post-foreclosure crisis housing market.
Truth: Ultimately, the generated cash flow, not the home price, is what matters.
When there were foreclosures left and right, investors were swooping down and snapping those properties up by the truckload. And why not? They were cheap, nice, and bountiful. It was a profitable time for investors! But now that foreclosures are down, some seem to be under the impression that the time to invest is over.
Those same people seem to think that investing in real estate should only be done when it’s easy.
The thing is, the price of the property isn’t what ultimately matters. How it balances out with your monthly cash flow is. And today, cash flow is pretty great! There’s plenty of money to be made as an investor. Anyone who says otherwise just plain isn’t paying attention.
Myth #6: Cutting costs at all costs should be my priority if I want to maximize my cash flow.
Truth: Not at the cost of your property’s condition and quality.
This is a dangerous misconception, and it’s the kind of thinking that creates slum lords. There’s value in being smart with your money. Frugality and smart money management is great in this business. What’s not good is cutting costs at the expensive of your property’s long-term value and condition to save short-term money.
Don’t go for quick fixes. Repair right the first time, even if it costs more. Don’t do band-aid temporary fixes. Make sure you’re hiring quality, reliable people to take care of your properties and your tenants.
Don’t cut corners where it really counts.
There are places where you can and should cut down on costs, but there are places where the premium is not only worth the cost, but you hurt yourself and your business by doing otherwise. (For instance, in property management and in property repairs!)