I both write and speak often about misconceptions of real estate investing because I know that so many people who are otherwise interested have given into the horror stories that they have heard from others. Below are three myths that people often mistakenly generalize into rules, and not exceptions, of real estate investing.
You Need Wealth To Start
Many people believe that you need gobs of money to invest in real estate. They believe that it is a game for the wealthy, and that those who participate already have large sums of money at their disposal. It is easy for this misconception to exist; the majority of the world’s wealthiest individuals have some portion of their net worth in real estate. But this is precisely why real estate is such a significant asset class and why anyone should pay attention to it.
In reality, there are so many ways that the average working-class American can invest in real estate. In fact, I will tell you how I brought my second house and first rental property (my first house was my primary residence that later became a second rental). After working nine years in Corporate America, I had a decent amount of funds in my 401k from which I withdrew to make the 20% down payment on the investment property. If you have been working for some time, and have a retirement plan, this may be the simplest way to get started. Do recognize that there are tax implications and penalties involved in withdrawing from your retirement plan before retirement age, so it is advisable to consult a CPA. In my case, in spite of the withdrawal penalties, i calculated that the returns from my new investment would exceed those short term expenses.
Other ways that one can fund real estate are using a home equity line of credit, partnering with others, or house hacking, which is buying a property and renting a portion out to someone else allowing you to offset or even erase your living expenses. The key to getting started without wealth is creativity and hunger to make it happen.
You Will Clean Toilets at 2am
I have heard some variant of this universal law quite a few times. This myth comes from many who have had friends, associates or parents who self managed their properties and did not follow key guidelines for ensuring proper balance and setting of expectations with tenants. Remember, when you hear these stories, which you inevitably will as you talk real estate with others, these fearful hypothetical scenarios reflect the do-it-yourself landlord operating in mom-and-pop fashion. There are multiple reasons why this is not realistic for you:
- You may choose to hire property management. When you have a property management team managing your property and tenants needs, they get the call and not you. They will likely have some emergency service that can handle these types of situations. You can be notified about it later at a more reasonable time. If you choose to have a property manager, ensure to understand their process for repairs, emergency needs, and when to contact you.
- Even if you self-manage, you do not need to do repairs yourself. In fact, you should not! When I first started, I made this commitment to myself. I knew that. I wanted to operate these rentals like a business and that I wanted to stick to the part I like about real estate investing, which is managing a business. Some enjoy the handy part; that is not me. And it is likely to not you. If you are like me, and choose to self manage, recruit a handy friend who can be your low cost, but reasonably-priced, go-to and medium so that you never have to step foot into the house for repairs.
- Tenants do not call you at 2am. It is true; I have not had that happen and do not know of any one who has. Even when my tenant’s A/C went out, they called me the next morning. This hypothetical scenario is an extreme that fearful people introduce as what is possible. Yes, it is possible to have the unfortunate call for repair in the middle of the night.
But two things to note:
1) If you or your property manager has set those expectations with your tenants, they will know not to call you at 2am, unless it is dire and something you need to know immediately.
2) Even if you happen to have to give attention to your property at an inconvenient time, it is uncommon, and this one-time a year experience is a small price to pay for the rent checks and appreciation, what we enjoy most about real estate.
Tenants Will Trash Your Place
I will make this one easy. Tenants occasionally do horrible things. You certainly can reference a story you have heard of tenants trashing a place and then skipping town, never to return again or pay another month of rent. Recognizing that this situation can significantly negatively impact a new landlord, the thought of this happening can be scary. Well, there are some things that we can do to mitigate this risk.
Get great tenants.
How do you do that? Screen very well. I talk some about my screening methods in a previous post, so check it out. The point here is, screening for good, qualified, high-quality tenants is your number one determinant of your experience as a landlord with tenants occupying your units.
If you do everything in your part to ensure that you have high-quality tenants, everything else is out of your control, should be prepared for with cash reserves and understood to be a cost of doing business. There is nothing to worry about!
Invest Wisely
Real estate investing is not a well-understood game for the masses. Oddly, there are books, websites and podcasts on the subject, authored and hosted by those who have done it. Learn from those who have been successful in this sport, and while you will find that it has its occasional headache, the discipline and up-front controls can prevent many of these myths becoming your reality.
