Investing your money in property is not the right move for everyone. While some people make their fortune with bricks and mortar, there are many reasons why you should not be a real estate investor.
This may sound like a strange statement from someone who is a successful real estate investor themselves, but, just because it worked for me, doesn’t mean that it will work for everyone. I am enthusiastic about sharing my knowledge and helping people achieve their own, personal version of success but what is just as important for me, is to help people avoid making a mistake and losing their money because they should not have been a real estate investor in the first place.
So, let’s jump straight into the 12 reasons why you should not be a real estate investor.
My 12 Reasons You Should Not Be A Real Estate Investor
This list is designed to help you make an informed decision about whether or not real estate investing is the right thing for you.
You Won’t Get Rich Quick
Real estate investing can make you money. Sometimes it can make you a LOT of money, but it is not a quick way to make your fortune.
One of the attractions of sinking your money into bricks and mortar is that you can use your own cash AND apply for a mortgage. This way you can purchase a much larger property today, instead of having to save and buy it in 20 years.
The flip side of this ability to invest with someone else’s money is that you won’t be making much in the way of a profit for several years. Yes, you’ll be making an income with the rent your tenants pay, but the most significant financial gain is in building equity. The thing about equity is that you don’t begin to see any worthwhile equity growth until after the five-year mark.
You Need A Start-Up Fund
Many newbie real estate investors assume that you need just enough money to score a mortgage and you’re good to go.
Nothing could be further from the truth.
Not only do you need your closing costs just as you would with a mortgage for your own home but before you can start earning any income you’ll need money for:
- Cleaning the property
- Replacing broken or missing fixtures and fittings
- Having an independent pest control inspection – & any resulting costs
- Smoke & CO2 detectors & alarms
- The identification and remediation of any mold issues
- The removal and replacement of any lead-based paint
- Changing the locks
- Repairing or installing any appliances as appropriate.
Presumably, you would have had a home inspection and will be aware of any significant issues that need addressing in the property. For this reason, I haven’t included anything that may be specific to a particular property.
Your Money Will Be Tied Up
If you know or suspect that you will need to dip into your investment, then that alone is a reason why you should not be a real estate investor.
Once you have purchased a property be prepared to leave it there. Although there are ways to obtain loans reasonably quickly, using your real estate as collateral, this should not be relied on as a way to get some cash in a hurry.
In fact, this will only become an option once you have paid off a significant proportion of your mortgage and have some actual equity to borrow against.
And we’ve discussed it the first point, how that won’t be happening any time soon.
You Have To Be Comfortable With Debt
Unless you are independently wealthy, to begin with, and have decided to dabble in real estate for a bit of fun, at some time or another, you will likely end up having to borrow money.
For some people, this is not a big deal, but for others, it is an anxiety-inducing concept. It may be short-term borrowing to make some significant upgrades between tenants – although you should have budgeted for that in advance – or maybe the HOA in your condo building has levied a special assessment, whatever the reason if you are debt adverse then you should not be a real estate investor.
There Are Constant Ongoing Expenses
Real estate investing isn’t a “pay once, and you’re done” endeavor. Once you have actually purchased the property, you need to be prepared to dip into your bank account on a regular basis. Some of the ongoing expenses, excluding mortgage and associated payments, include:
- Property taxes: In some jurisdictions, the property taxes on a rental property are significantly more than that of a primary home. In South Carolina, for example, an owner-occupied single-family home has property taxes of around $600. The taxes for the same property when it is owned as an investment property are approximately $2,000.
- Insurance: This will cost more than your regular home insurance, but a landlord policy will protect you if a tenant should sue you for damages. You might also want to add extras so the policy will pay out if your property is damaged by burglary, vandalism, or tenant caused damage.
- HOA fees if you purchase a condo
- Regular repairs and maintenance: The owner of a rental property should set aside approximately 1% of the properties value every month, for repairs or maintenance. That’s $100 for every $100,000 of the current valuation. This is the bare minimum, and it is always sensible to put aside some extra if you can.
- Travel and accommodation: If your investment property, or properties, are not within an easy “there and back in less than a day” distance, you are likely to find yourself paying for travel and accommodation. These costs are not restricted to a hire car and/or a flight and accommodation; you can throw in meals, snacks, and all of the little bits and pieces you end up buying when you travel for business.
- Accountants fees: Yes, you can do all of your own bookkeeping, but it is not advisable. Especially when it comes to working out what you can and cannot claim on your taxes or which tax deductions would be most beneficial if you make a mistake, it doesn’t matter to the IRS whether it was accidental or not; the consequences are the same.
- Miscilainious running costs: Some things are easy to overlook because they are not especially expensive on their own. However, when you sit down and add them up, you might be surprised at how much you spend on things like paper, printer cartridges, etc.
These are just the regular costs for which you need to budget, and it is sensible to also put some money away each month for unexpected expenses.
Oh, and guess what?
Just when you thought you had it all worked out, something unexpected will pop up.
Don’t believe me?
I know of one relatively new real estate investor who had come into a reasonably large amount of money and purchased several, low-cost rental homes. He carefully worked out the maximum number of properties he could afford, while budgeting for running costs.
This investors budget was pared down to the bare minimum, and he had no wiggle room. The problem was that he lived in California and his properties were in the mid-west. He had budgeted for the travel and accommodation, but he hadn’t counted on one surprise expense.
Yes, this particular California resident lived almost year-round in shorts, tee-shirts, and sandals, not the best wardrobe for a mid-west winter. He had viewed and purchased the properties in mid-summer, and whenever he traveled, it was with a small carry-on, which was just big enough for his year-round-sunshine clothes.
Yep, “Sunboy” as he is known to our circle of friends discovered pretty quickly that buying a full winter wardrobe, and the new luggage large enough to carry it, PLUS the additional luggage fees for the flight ate up any profits he had for some-time.
The moral of this story? As well as location, location, location, real estate investing is about preparation, preparation, and preparation.
Being A Landlord Is A Full-time Job
The income from rental properties is considered, by the IRS, to be “passive income.”
Don’t believe them.
This is purely a tax-related category because I can tell you from personal experience that being a real estate investor is undoubtedly in no way a passive way to earn money.
I have already touched on the costs and the kinds of things such as visits to properties to either carry out, oversee or inspect repairs and maintenance but that is a drop in the ocean when it comes to the kinds of things you need to do.
- Identify and research your target property markets: This in itself should take you a considerable amount of time. If you are not prepared or able to put in the time and effort to discover which properties will make suitable rentals, then you should not be a real estate investor. This step is the foundation of a sucessful of a successful real estate investment portfolio.
- Find and view suitable properties within your budget: Once you have identified an appropriate geographical area for your rental, you have to track down a specific property. Do you know what it’s like when you are buying a home? All of those viewings, second viewings, mixed emotions? Take that and multiply it by ten, as the property you settle on will be the new home of your savings.
- Make your purchase: Three simple world’s which cover all of the stresses and traumas of; researching and applying for a mortgage, going through the home inspection and appraisal process, negotiations with the sellers and finally, after weeks, if not months, of work, finally being able to close the sale.
- Prepare the property for renters: This can be anything from a quick spruce up and clean through to a total renovation from the ground up.
- Advertise for, screen, and interview prospective tenants: You may be able to throw a quick add onto Craigslist, but the quality of your advertising will reflect the quality of your tenant. When you take good quality photos to showcase your investment, write a thorough listing, and vet your prospective tenants, you will minimize the possibility of having problem tenants. Once you have a pool of potential tenants, you’ll need to carry out the background, employment, and credit checks before entrusting your new investment to your chosen tenants.
- Be available 24/7 in case of emergency: If the pipes burst at 3 am, the roof collapses after a heavy snowfall, the door is kicked in during a burglary, or anything else you can think of, you need to be available to deal with it there and then.
- Attend the property for repairs and maintenance: You will need to either attend and carry out repairs and maintenance yourself or arrange for someone else to do them and attend to oversee or inspect after completion.
- Collect the rent: Even an electronic payment needs to be checked and recorded every month.
- Deal with tenants complaints: It is not just emergencies you will need to deal with. Needy tenants can be a nightmare with complaints and requests about everything from the color of the walls to the neighbor’s dog barking.
- Deal with problem tenants: On the other hand, it may be your tenants, which are the nightmare. Noise complaints from neighbors, visits from the police, criminal activities, I even heard of one landlord who found themselves with a tenant who liked to start small fires in the house — something he only discovered after the sixth fire.
- Carry out evictions: If you do have problem tenants, the eviction process can be a long, expensive, and emotionally exhausting one.
- Stay abreast of your legal rights and responsibilities: Once you have your property and tenants in place, you need to ensure you keep up to date with any changes in local, state, and national legislation and regulations.
It Takes Up Your Time
In a similar vein to the point above, not having enough time is a reason you should not be a real estate investor.
If you find yourself, on a reasonably regular basis, wishing there were 34 hours in a day instead of 24 you are already at the stage where becoming a landlord is not the right thing for you.
Admittedly, some of the tasks above will not be regular ones to which you have to attend. You might even go several months and have to do nothing at all apart from check the rent has hit your bank account, but the time will come when, for a certain period, your rental property will consume your every waking moment.
You Need Mad Management Skills
So, I’ve told you all about the time, money, and energy, it costs to be a sucessful real estate investor, but that’s not the last of it.
To juggle all of these tasks and responsibilities, as well as those of your regular working, family, and community lives, requires you to have ridiculously good time and project management skills.
The IRS Moves The Goalposts
You should not be a real estate investor if you are counting on the tax benefits to make it profitable for you. While, until now, the tax code has been generous to property investors, with each revision to this area, those financial advantages have been eroded.
It is not unreasonable to assume that this may continue.
While the current tax benefits are an attractive incentive to invest in property, they should not be counted upon.
The Market CAN Crash
Real estate is one of the safest and most stable investments available – when it is done correctly. Having said that…
Yep. The market can crash, and it can do so spectacularly.
The only insurance against significant loses in a crash is having properties which are in locations which will continue to earn rental income while you wait out the financial storm.
If You Make Mistakes, It Can Be Catastrophic
One reason you should not be a real estate investor is that any mistakes you make can see you losing your property and your initial investment, and maybe even being significantly out of pocket. Errors which can be made include:
- Buying a home in a neighborhood which is on a downward trend
- Purchasing a property next to, or close to a house which is used for criminal activities
- Not looking into planning applications before your purchase and finding out there is a major roadway being built at the end of the garden
- Investing in a community with one major employer and having that employer close down.
- Etc, etc., etc.
These and other events can result in you owning a property for which you cannot find renters. Alternatively, you can discover the value of your real estate plummets and will never recover.
You Are Too Much Of A Softy
There is nothing wrong with being empathic and taking into consideration any short-term issues your tenants might be experiencing. For example, you may get a call to say that your tenant has lost their job. You are in a position where you have to decide whether to give your tenant extra time in which to make their next rent payment or whether to stick to the agreed payment schedule.
While many tenants are good, honest people, there are plenty of people who will take advantage of another good nature.
There is no harm in showing kindness, but if you are unable to treat your landlord role as a business, then this is one reason why you should not be a real estate investor.
Becoming a real estate investor was one of the best decisions I have ever made, but that’s not to say it is the right investment for everyone.
If you are unable to manage multiple obligations, cannot afford to have your money tied up for years, don’t have the funds with which maintain your properties, or are unable to treat your investment as a business, then these are all reasons why you should not be a real estate investor.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.