Save up some cash, buy some real estate, cash flow for life, right?…
Anyone can do it! Quit your job and just do real estate, right?
Things aren’t always so simple in any business, but especially real estate.
The simple fact is that almost anyone can be a real estate investor, but not everyone should be a real estate investor.
Real Estate is a Tough Field
It’s simply true that real estate is extremely risky.
If you know the numbers and get everything right, real estate has basically no risk. The problem – it’s impossible to know all the numbers.
Recently, I bought a property and when I pulled up a rug I found a damaged hardwood floor. When I went to repair it I found the entire sub-floor including joists was eaten by termites.
There are things that you simply cannot account for when running the numbers.
But before we get too far into this discussion…
What is Real Estate Investing?
For today, “real estate investing” means anyone who is actively involved in buying real estate. This could be rental property, house flips, etc.
This article is not referring to completely passive investments such as REITs, real estate funds, syndication, etc. Those are really not much different than buying a stock, so they are really outside of the scope of this article.
Real estate requires a lot of money regardless if you are a house flipper or buy-and-hold investor.
You can get away with 3.5% down on your first couple rental properties by gaming the system. But, if you truly want to grow, it requires 20-25% down in order to purchase any property.
No matter who you are, there is no endless source of funds. So, eventually, we all run out of money and can’t grow as fast as we’d like.
On the other hand, House flipping requires way more capital with 100% cash purchases. You can finance these with hard money or private money at extremely high interest rates.
So, while you can invest with little to no money of your own if you do it right, you accept a ton of risk by having short-term high-interest loans sucking at your profit margin.
In fact, house flipping has some of the lowest gross margins of any industry, clocking in at just 12% while other industries have a gross margin of 35-85%. If there is even one or two unforeseen problems, your margin disappears and you lose money.
So, while it requires a lot of capital to play, the room for error is extremely small.
Time and Energy
Along with the massive amount of capital required to invest in real estate, it requires a ton of time too.
House flipping is the worst because 50% of the effort goes to finding a deal and you have to spend just as much time setting up the project, overseeing it, staging it, and selling it.
Rental property is a lot easier than house flipping, especially if you use a management company. But, there is still a lot of time involved when you are actively looking to find a deal.
Even if you do have a management company, you will have to make a lot of decisions related to the property for years to come. While this may not be a huge time requirement, it is still something you need to consider.
Real Estate is a High-Profit Field, but…
It’s only high profit if you aren’t the one putting in all the cash.
Think about it this way:
You do a flip that has a cool 10% profit (gross margin minus any overhead expenses).
So, if you bought a $250,000 property, you’d get $25k.
But, since you don’t want to put in $200+k of your own money, you finance most of it (let’s say $200k) at a 10% interest rate for 9 months which is $15k of interest (excluding any points or attorney fees which are common). So, you get $10k now.
If the project cost $225k and you financed $200k, you only invested $25k of your own money and returned $10k, your overall return is 40%.
So, it sounds like a huge return, but for the massive amount of cash that was invested along with months of effort and work, $10k may not be worth it even if it is a 40% return.
Who Should NOT Buy Property
Now that I’ve listed out all the negatives of real estate investing, let’s talk about who benefits the most and the least from it.
First, let’s go over who should not buy property
If you are very wealthy, you probably should not actively invest in real estate.
For you, it’s better to let the people with less money but more time do the investing for you.
Focus on being a hard money lender, a passive investor in a syndication, or something similar.
Your time is best spent growing that wealth rather than getting bogged down in the details on a deal.
Those With Good Jobs (or who don’t want to quit)
If you have an amazing job that you love, then you may not want to quit. Real estate will distract you from your true passion, even if there is a lot of money to be made.
Similar to the very wealthy people, you should focus on investing more passively.
Don’t Invest in Real Estate if You Have a Low Level of Risk Tolerance
We’ve gone over a couple examples of how real estate is risky. In my opinion, it’s no riskier than the stock market, but the combination of leverage and unknown risks can quickly make a profit margin disappear.
If you have a low tolerance for risk, you should focus on investing in much safer investments under the guidance of a money manager.
Who Should Invest in Real Estate?
Clearly, real estate is not for everyone, but who is it for?
We’ll get into that in a minute.
But, before you decide to even consider investing in real estate, you need to consider getting a good real estate investing calculator. If you are new, it’s just too easy to miss something.
So, go ahead and get this FREE calculator to help you start playing with the numbers and analyzing deals.
Dead End and Dull Job You Hate
If you hate going to work, waking up every day dreading what you’re doing, then it’s time to invest in real estate.
Real estate will give you the opportunity to do something exciting and fun, and make more money in the process.
People With Spare Time
If you have an easy job that is paying you well, and you find you have a lot of extra time and you want to get a side hustle or part-time job, then real estate might be a good choice instead.
Very Skilled in Math and Construction
If you’re one of the very few people out there who happen to be really good with numbers and with construction, then real estate is an obvious place for you.
Unfortunately, most people are good at one or the other. But, most real estate investors are very knowledgeable in both areas.
Average Person With Average Job
For the average person, real estate investing could be life-changing.
Don’t get me wrong, if you are working 120 hours a week and have zero tolerance for risk, this is still not for you.
But, if you are an average 40 hour a week type worker with some spare time, real estate is perfect for you.
Think about how much an extra $500 or $1,000 per month would change your life. Or, a quick $15k profit on a flip.
Real estate is such an awesome field because it changes lives. and that’s why you should invest.