Everyday more people are lured into the world of real estate investing. The optimism of purchasing a property to make a profit can surely be attractive to many looking for greater returns. While real estate investors advocate their success to others, the appeal of buying and flipping properties increasingly seems like a surefire way to earn a killing — not to mention a safe haven for your cash. I mean, after all it is real estate. And many people who are inclined to invest in real estate will radically make a decision to go all in when it comes to rehabbing homes.
They’ll take their life savings and gamble on the chance to make money on a foreclosure, or short sale. But what are they truly signing up for? Is
it really wise to invest your savings into one investment opportunity? Below are four misconceptions new real estate investors most often have.
Misconception #1: Anyone can do it
While some fixer uppers require small, cosmetic improvements, the majority of them are almost guaranteed to unleash a pandora box of costly repairs. It’s truly difficult to estimate the amount of cash you’ll need to update these homes until you’ve actually purchased the property — bringing many novice investors (on a limited budget) to a complete halt until they can invest more capital into renovations. For the unexperienced, what may seem like an easy do-it-yourself project, can actually turn out to be an unwieldily and stressful experience.
Realistically, if you can’t do most of the labor yourself, you may want to reconsider what you’re getting yourself into. Most people who do this for a living (and are successful at it), usually have backgrounds in construction and real estate and understand the amount of work involved in cost-effective, home rehab projects. They also tend to be highly experienced when it comes to building permits, construction delays and unforeseeable issues. When you have to hire professionals to do most of the work, the chances of making a profit are slim.
Misconception #2: You are guaranteed to make a profit
An investment in real estate doesn’t necessarily translate into profits. While it is a wise option for some to own real estate for the long run (perhaps in the capacity of a second source of income), flipping properties for profit, is a whole other beast. It requires money, a precise, cost- effective strategy and a keen understanding of market timing. And like any other investment option, some level of risk is involved. Many flippers will take a loss from time to time. Ask any real estate investor and they’ll tell you that they’ve had their share of flops.
It’s easy to believe all the success stories, but it’s not as easy as it looks and sounds. In order to be truly profitable, the sale price must exceed the combined cost of acquisition, the cost of holding the property and the cost of renovations. Otherwise, it’s just not worth it. It’s also important to remember that when you sell, you have to pay capital gains taxes. This could be the determinant in whether, or not you make a profit.
Misconception #3: You don’t need to quit your day job
Contrary to what some believe, flipping houses is a full-time job, not a weekend project, or a hobby. It’s a labor-intensive, cash-consuming process that requires your undivided time and attention to details, costs and market cycles. If you’re not committed to the project, you may end up spending more money than you anticipated. And in some cases that also means taking a loss. Many beginner real estate investors don’t budget enough time for purchasing materials, renovations, site visits, building permits, inspections and selling the property itself — which are all key factors in successfully flipping investment properties on schedule.
Misconception #4: The property will sell quickly
Every rehab venture requires a back-up plan. One of the biggest mistakes newbie real estate investors make is to assume the property will sell quickly. What might seem like a great deal to the investor, may not actually be what buyers are looking for, or the right time to sell. When it comes to flipping properties, you take a chance on those ‘what-if’s’. You have to remember that there is a possibility the house will sit on the market for a while before its sells. And if you don’t have a back up plan, you may actually start to lose money as you’ll soon have to start paying the mortgage (if you didn’t buy cash) and property taxes while continuing to invest money into maintaining the home in sellable condition.
When real estate investors find themselves in situations where they can’t sell in their anticipated time frame, a decision to wait it out, drop the sale price, or rent the property will have to be made to minimize losses.
Not all real estate investments are for everyone. Although real estate continues to be one of the ideal markets to invest in, investors should do their due diligence and evaluate all available options before jumping in to any one investment. While some certainly enjoy the process of rehabbing homes for profit, many investors will also find that alternative investments in real estate can also yield high returns.
Investment options such as limited partnerships and REITs (real estate investment trusts) can
generate decent returns, without the hassles that come along with renovating and selling a property.
Before you invest your life savings on a whim, remember a passive real estate investment can also build your wealth.
Considering an alternative investment in real estate? Click here for more information on how you can earn up to 6.5% APY interest on your investment with Jakob Pek Fund.