Troubles with Traditional Real Estate Investments That You Should Avoid
The five leading problems with investing in real estate as many people understand it, are these:
Problem #1:
Paying a lot as a down payment
Often the largest obstacle to people starting up the real estate ladder, whether as an investor or homeowner, is getting the money for a down payment. 20-30% down isn't uncommon, and other than the problem for many in raising the money, it can suddenly mean that the return for your investment is significantly lower. If you can get into a deal with 5% or less as a down payment, your return on investment shoots through the ceiling (just as long as it's still a profitable deal).
Problem #2:
High risk
Even if you don't think of your return on investment (which you should not ever do in practice), placing more of your funding in a single deal means it is a more risky venture. An elementary concept of stock investing is figuring out your position sizes, and that same concept is essential to real estate investment. The larger the investment in one trade, the more you're exposed. If you have nothing down in a deal then surely you can acknowledge that your risk is drastically decreased.
Problem #3:
The property owner trap
For every investor who acquires a large number of homes, there's a point when they tend to get into the "landlord trap." This is when the investor is so overloaded managing and working on what he already has, that there's no time to get any more homes.
A way around this is to outsource the property management, and while this may be a perfect solution for some people you must factor in the significant added price that comes with it. Other inventive solutions can be used by the smaller investor, that include methods of negotiation that see the leaseholder satisfied to be in charge of the repair and maintenance.
Problem #4:
The Do it Yourself repair trap
The majority of ambitious investors think that the highway to success in real estate is to invest in properties, repair them, and flip them for profits. While this is one of many practical plans, very few understand that this does not mean doing the rehab work on your own.
A key to real estate success is leverage. if you do not leverage your time by employing other people for the improvement or repair work you will seriously limit your real estate investing ability. Doing repairs all by yourself is a surefire way to keep your investing business small.
Problem #5:
Negative money flow
A lot of people see compounding appreciation as the actual fortune builder when it comes to real estate investment planning. The trouble is that in order to enjoy that growth, most investors are funding it on an ongoing basis by way of payments. Typically, when you purchase more costly properties, the rental returns simply don't keep up with the property values which makes it extremely strenuous to have good cash flow. And for investors that try to minimize their down payment as suggested above, the dilemma is made worse by having larger loan repayments.
Previously, if you wanted the large payoff over time the only choice was to cover the negative cash flow, however it is not that way any more. There are a few clever investment techniques that allow you to enjoy the privileges of inflation and also remain cash flow positive.
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