Common Real Estate Problems That Should Be Avoided
The 5 leading problems with real estate investment as many people understand it, are these:
Problem #1:
The Do it Yourself rehab trap
Most people believe the way to real estate investing success is to purchase homes, fix them up, and then sell them for more money. Although that is one of many feasible game plans, very few understand that that does not require doing the improvements all by yourself.
A secret to real estate success is leverage. unless you leverage your time by employing other people for any repair or renovation work you'll be seriously restricted in your real estate investing capability. Doing rehabs yourself is a definite way to keep your investing business small.
Problem #2:
Big down payment
Typically the biggest stumbling block to those starting on the property ladder, either as a homeowner or investor, is the down payment. 20-30% down is not abnormal, and apart from the challenge for most people in getting the cash, it also means that the return from your investment is significantly lower. If you are able to find a deal with 5% or lower for a down payment, the ROI soars through the roof (as long as it is still a profitable deal).
Problem #3:
High risk
Even without thinking about your return on investment (which is something you should never do in practice), placing a lot of your funding in a single endeavor makes it a risky proposition. A basic concept for stock investing is figuring out your position sizes, and that same concept is important in real estate investing. The bigger the investment in a single transaction, the more vulnerable you are. If you've got nothing down in a venture then surely you can agree that your risk is considerably reduced.
Problem #4:
Negative money flow
Many investors see compounding appreciation as the real wealth builder in real estate investment planning. The problem is that in order to have that growth, many investors fund it on an ongoing basis with negative money flow. Often, when you purchase more extravagant properties, the rent received simply doesn't keep pace with the home values which makes it VERY strenuous to earn positive cash flow. And for those who try to minimize the down payment as we mentioned above, the trouble is magnified because of the higher loan repayments.
In the past, to have the large payoff over time you had little choice but to fork out the negative cash flow, however it doesn't have to be that way. There are several brilliant investing methods that will allow you to stay cash flow positive and also enjoy the benefits of inflation.
Problem #5:
The home owner trap
For all investors that acquire a couple homes, there's a point when they tend to get into the "landlord trap." This is when the investor is so overloaded maintaining and managing what he has already got, that there is no time to go and purchase more properties.
A solution to this is by outsourcing the property management, and while this is a great answer for some people you must be mindful of the substantial added expenses. Some inventive solutions exist for the beginning investor, that include negotiation techniques that see the occupant content to take responsibility for all the repair and maintenance.