Fear is natural — especially when doing something for the first time.
For many, this is also the case when it comes to investing in real estate.
Even though real estate has proven to be a reliable investment option, would-be investors often have hang-ups that keep them from making what could be a great financial move.
Here are the common real estate investment fears, how to face them strategically, and how to make sound financial decisions based on your personal situation.
1. I’m going to buy the wrong property
We live in “swipe culture” where the prospect of a better option often keeps us from making a decision.
If you’ve ever spent 30 minutes deciding what to watch on Netflix, you know what we’re talking about.
In real estate, while you need to do your due diligence and should key in on specific locations and home types, it’s important to remember that there’s no such thing as perfection. And, as long as you’ve done your homework and are working with an expert Realtor, any property presented to you should be of high quality and value.
Also important to remember: passing up today’s opportunities for “better” options could end up costing you more in terms of purchase price and lost appreciation.
“Imperfect action is better than perfect inaction.” – Harry Truman
Learn the key components of a profitable real estate investment.
2. I’m going to overextend myself financially
Actually, this is a healthy fear to have; you should never overextend yourself.
That said, by understanding prevailing market rents, nailing down your mortgage costs, and consulting with your Realtor about your ownership expenses, you’ll be equipped to project your monthly cash flow and ROI — and invest with confidence.
Learn how to calculate your cash flow, ROI, and budget.
3. I’m going to have bad tenants
This, and the fear of having to manage a property, is enough to cause some would-be investors to freeze in their tracks.
Just as no property is perfect, there’s no such thing as the perfect tenant. But, with a proper tenant recruiting and vetting process, you’ll dramatically increase the odds of landing stellar renters who respect your property and pay their rent on time.
And, if you hire a property management company, you’ll never have to worry about finding great tenants, taking late-night calls, or chasing payments.
Learn more about how to make your real estate investment passive.
4. I might make better financial gains elsewhere
Could you increase your net worth more by investing in stocks or cryptocurrencies? Of course.
But, for many people, real estate’s reliable track record combined with its unique ability to increase your net worth in three different ways — appreciation, mortgage paydown, and cash flow — makes for a compelling yet comfortable investment.
Oh, and let’s not forget the net-worth-amplifying effect of leverage.
Learn about the impact of leverage and other compelling reasons to invest in real estate.
5. I could lose money in a market correction
We saved the greatest fear for last.
People are often afraid of buying an income property because, if home values drop, they’ll lose more in terms of net worth.
But, as always, framing is everything.
Let’s, for example, take a look at what would happen if home values did something extreme and the polar opposite of market forecasts: they dropped 20%.
Scenario 1: You own a principal residence worth $1 million
Your portfolio value would drop by 20% down to $800,000 — a $200,000 loss.
Scenario 2: You own that same $1 million home and a $500,000 rental property
Your portfolio would drop from $1.5 million ($1 million + $500,000) to $1.2 million (20% off $1.5 million).
In either case in this (very extreme) scenario, you’d lose portfolio value. But, by investing in a rental:
- Your portfolio would be worth $1.2 million vs. $800,000 — more than where you started.
- That additional mortgage you took on to increase your portfolio value? Your renters are paying it off — not you.
- You’re generating cash flow — something you weren’t doing before. Even if the market never recovered, you’d be making financial gains.
And, after you’ve addressed the worst-case scenario, try to imagine the impact of even the most modest market GAINS.
This obviously isn’t a complete assessment; the point of this illustration is to show you that, when it comes to investing, it’s important to assess risk holistically, and then measure that assessment against your goals and risk tolerance.
As always, to determine a path that you feel comfortable with, you’ll want to speak with an expert Realtor who knows the market and focuses on income properties to discuss your goals, dreams, and fears.
Your path may or may not end up including a real estate investment, but either way you’ll be confident that your decisions will be made based on facts — and not fear.