Troubles with Real Estate Investments That Should Be Avoided
The five leading problems with real estate investment as most people understand it, are:
Problem #1:
The landlord trap
For anyone that acquires a lot of homes, there's a point when they tend to fall into the "landlord trap." This is when the investor is so overloaded keeping up and managing what he already has, that there's no time to get out find more homes.
A solution for this is by outsourcing the property management, and although this is a good answer in some cases you must calculate the substantial increased expenses that come with it. Other creative solutions can be used by a beginning investor, which include methods of negotiation that see the occupant happy to take responsibility for all the repairs.
Problem #2:
High risk
Even if you don't think of your return on investment (which you should not ever do in practice), having a lot money in a single venture makes it a more risky plan. A concept of investing in stocks is figuring out your position sizes, and the same concept is important to real estate investment analysis. The larger the investment in one transaction, the more vulnerable you are. If you've no money down in a venture then it should be obvious that your risk is drastically decreased.
Problem #3:
Big down payment
Often the greatest stumbling block to those starting on the real estate ladder, either as a home buyer or investor, is getting money for the down payment. 20-30% down isn't abnormal, and aside from the difficulty for many people in raising the money, it can mean the profit from your investment is significantly lower. If you are able to find a deal with 5% or less for a down payment, the return on investment is going to shoot through the roof (as long as it's still a lucrative deal).
Problem #4:
The Do it Yourself rehab trap
The majority of new investors feel the way to success in real estate investments is to get homes, fix them up, then sell them again for a profit. While this is one of several practical strategies, few understand that doesn't mean you must do the repairs yourself.
A key to success in real estate is leverage. Until you leverage time by hiring contractors for any repair or improvement work you will be extremely held back in your investing capacity. Doing renovations on your own is a good way to keep your investing business small.
Problem #5:
Negative money flow
A lot of people view compounded appreciation as the real cash builder when it comes to real estate investment planning. The problem is that in order to have that growth, the majority of investors fund it on a continuing basis with payments. Often, if you buy more expensive properties, the rental returns just don't keep up with the home values which makes it VERY challenging to generate positive cash flows. And for investors who minimize the down payment like we mentioned above, the trouble grows by having higher loan payments.
Previously, to enjoy the big payoff over time you had little choice but to fork out the negative money flow, however it doesn't have to be that way. There are many ingenious real estate investing techniques that allow you to enjoy the privileges of inflation and also stay cash flow positive.
