Investing in real estate is a proven way to generate passive income. In fact, in addition to stocks and and owning a small business, buying and owning real estate is one of the best ways to build wealth.
It is so because you can use the power of leverage to buy a property by paying some of the property’s total price, then pay off the balance over time.
There is also significant tax benefits when you invest in rental properties.
While you can succeed investing in real estate, real estate investing is not for everyone. Here are 7 signs you’re not ready to invest in real estate.
Investing in Real Estate: 7 Reasons Your’re Not Ready
1. You’re not financially fit.
Investing in real estate is not rocket science.
But you must be financially fit before plunging into it. Let’s take an example of buying a house to live in. You need to buy a property, budget for all of the upfront costs associated with it, including repair costs.
Then, you need to make sure you make your monthly mortgage payments every month, pay your insurance, property tax, etc.
Owning rental properties is even more complicated. And if you’re not able to manage the challenges that comes with owning your own personal home, then investing in real estate is not for you.
Moreover, do you save money? Do you know how? Most successful real estate investors start their journey by saving their money.
In fact, you will need a down payment for your first property.
And banks and mortgage lenders generally require at least 25% of the home purchase price as a down payment.
Investing in real estate also requires a lot of planning.
It is much easier to buy some mutual funds or buy stocks with a broker than it is buying your first real estate investment property. You need a plan, patience, and a lot of hard work.
2. You don’t value the importance of maintaining good credit.
Your credit score and credit profile is vital when it comes to investing in real estate.
Late payments, default judgments, several credit inquiries can negatively impact your credit score. And with a low credit score, mortgage lenders would be less inclined to do business with you.
Indeed if you think it’s tough to buy a personal house due to a low credit score, just try to get approved for a loan for investment purposes. Even in the best market condition, in can be next to impossible.
So, building and maintaining an excellent credit score is key to start investing in real estate.
So, if you always have bad credit and don’t plan on fixing it, investing in real estate is just not for you. On the other hand, if a low credit score is your only problem, there are easy ways to raise your credit score.
3. You don’t have time to devote to investing in real estate.
Investing in real estate is just not for you if you don’t have time for it.
Buying real estate investment properties to generate cash requires a lot of work. Being a landlord is also time-consuming. You need to look for properties, examine neighborhoods, hire a team, and so many other things.
If you lack the time to do these things, you’re more likely to buy a property at a higher price in a bad neighborhood.
While you can hire a property manager to do things such as screening tenants, collecting rents and doing repairs, but these things cost money. And you might not have a lot of money, especially if you’re a beginner investor.
So, if you are an aspiring real estate investor, you must dedicate your time to it. While real estate can generate money passively, it’s not a passive investment (except for Real Estate Investment Trust (REITs)).
While you may have a team of professionals assisting you such as property managers, real estate agents, etc, you still need to be hands-on.
If you don’t have the time due to other responsibilities, you may want to invest in more hands-off, passive investments. Mutual funds or index funds are good examples of passive investments.
4. You’re investing in real estate for the short-term.
Real estate investing is not a short-term investment. In other words, don’t expect your investment properties to increase in value in 1 to 3 years. In fact, you’re more likely to lose money in the short term.
Rather, over the long term, you should be able to make 8 to 10% per year investing in real estate. Moreover, don’t get into real estate investing in the hope of selling them within a short period of time.
Unless you’re flipping houses, which is another topic, doing so is not advisable. Rental properties are not liquid.
Unlike stocks which are relatively liquid where you can buy or sell them within a day or two, it can take you a long time to sell a rental property.
5. You can’t deal with problems.
Just buying your first rental property has so many challenges. First, you have to look for the right property and select the right team to move the process along.
That itself involves a lot of headaches. There is also problems dealing with banks and mortgage lenders before they approve you for a loan.
Owning and managing the property also comes with their own unique problems. The tenants might not care for the property like you would.
You will have to deal with tenants calling you every now and then to fix things. You will have to deal with evictions, lawyers, the court system, etc.
There’s also vacancy.
And the more your properties are vacant, the more money you lose and the more headaches, especially if you’re relying on your rental income to pay the mortgage.
If you can’t deal with these problems, or if every little problems cause you a great deal of stress, you don’t have what it takes to investing in real estate.
So, unless you have a property manager to do these things, being a landlord can be a stressful job.
6. You can’t handle market downturns.
When you hear market downturn, the first thing that might come to your mind is the stock market. I am here to tell you the real estate market does also crash.
And when it happens, it happens big time. The real estate bubble in the late 2000s is a good example.
And if you can’t stomach your investments depreciating during a weak real estate market, perhaps investing in real estate is not for you.
7. You’re investing in real estate to get rich quick.
While you certainly can build great wealth through real estate investing, you can also lose all of your money.
And if you have getting-rich-quick mindset, you may do things that can make you lose money. Investing in real estate is and should be your long term investment goal.
You have to be able to stay the course, otherwise investing in real estate may not be for you.
The bottom line is investing in real estate can make you very wealthy. But it’s just not for everyone. It takes a lot of discipline, careful planning, and a lot of research to purchase the right rental properties.
Work With A Financial Advisor Near You
If you have questions beyond investing in real estate, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.