By Marco Santarelli of Norada Investments (with editing & additions by Chris Della Rosa)
There are various myths about real estate investing that never seem to die no matter how much you try to kill them! Hopefully, the information provided below will help you avoid falling for these untruths.
Myth #1. You Can’t Make Money in Real Estate Without a Lot of Money
It’s true that you usually (but not always) need money to get started in real estate. However, you don’t need hundreds upon thousands of dollars to get your investment career started and moving!
One of the great benefits of real estate is “leverage”, that is, you can use very little money to buy your way into properties that will keep on appreciating over time and increasing your wealth.
If you are short on cash and want to invest right away, then partnering up with another real estate investor may be an option to consider. Having a “cash partner” to invest with you in your deal is a quick shortcut when your only hurdle is the initial down payment.
As you can see, having a lot of money is not necessary. However, it does help because it accelerates your wealth-building plan. The wonderful thing about real estate is that you can get started by building up your cash reserves, and you can then leverage those reserves into more and different investment opportunities.
Myth #2. You Need Little to No Knowledge to Become a Real Estate Investor
Ignorance is not bliss when it comes to real estate! You can get your financial head handed to you in short order if you don’t know what you’re doing. The best action to take is hire an agent who is an expert in the market you are considering. Make sure it's someone with enough experience in trends of the area, as well as one who has a good mind for numbers. After all, it's an investment.
Myth #3. You Should Time the Market to Have the Greatest Success
While it’s true that real estate is cyclical (like the stock market), the fact is that the cycles are much slower and longer than that of securities. So, you can’t time real estate investments in the same way as you can with stocks and bonds. It’s a whole different mindset – a longer-term one, for the most part. Let me explain…
The real estate cycle typically works in this fashion:
High real estate demand creates a property shortage and higher rents, and appreciation along with it.
To meet demand, more properties are built or become available. Although that is not presently the case.
The typical result is – too much inventory, and rents and property valuation decline.
The cycle begins again.
Naturally, unexpected economic influences (war, catastrophes, etc.) can influence the cycle as well. But, remember what I said before – all real estate is local! Even in a down market in, say, Fort Myers FL., the real estate “rose” can be in full bloom in Hilton Head, SC.
So, it’s not about timing in the larger sense; it’s about timing in the sense of finding and buying properties that meet your investment goals wherever and whenever they are. Or, as Gary Keller said in his great book, The Millionaire Real Estate Investor, “Timing isn’t about being in the right place at the right time. It’s about being in the right place all the time.”
Myth #4. Only Invest in Appreciating Markets
Many investors believe they should only invest in an appreciating market. This is simply not true! You can make money in any market and any economy.
The key is to pick the right strategy for the market. For example, if you purchased a property from a distressed seller at a price far enough below the current market value, then you could buy in a declining market and be able to flip it for a quick profit, or hold it for cash flow, assuming you bought it with the right terms.
Myth #5. Real Estate is a ‘Get Rich Quick' Investment
This is not true! However, it is the best wealth accumulator. You may not hear of too many people getting rich within one year, but you will hear of many people becoming wealthy over a few short years and certainly over the long term. Real estate is a solid “get-rich-slow” investment.
Myth #6. The property must have a positive monthly cash flow.
This simply isn't true. Consider any non-income producing property, like your home, for example. Over time they are almost always a positive investment. And for the extent of ownership they are all negative cash flow.
A simple way to look at real estate investing is as follows: Find a property that has a greater annual appreciation over a period of time than its cost to own over that same period. Here's an example:
Let's assume your $350,000 investment villa's total annual expenses (mortgage, condo fees, maintenance, etc.) are $3,500/month or $42,000/year.
You collect $3,000/month in rent, or $36,000/year. That means your cost to own is negative $500/month or $6,000 annually. Your total cost to own over 5 years = $30,000.
However, over that same five year span the villa has appreciated by an average of 7% per year totaling $490,000. That's a five year appreciation of $140,000.
Your total return on your investment over only 5 years would be $104,000.
So, in short, negative monthly cash flow is not necessarily a bad thing. You must look at the BIG PICTURE.
I hope this article has provided some helpful insight into the world of Real Estate Investing. If you would like more information please do not hesitate to contact me at www.ChrisDellaRosa.com.