5 Faulty Assumptions About Real Estate Investing

By on May 4, 2015

I have discovered in many conversations with investors a distinct difference in the way beginners and veterans think.

New investors are thinking based on what they hear and what they read. They then create their own interpretation of what that means to them. On the other hand, a seasoned investor has experience under his or her belt and thinks based on those logical experiences.

The key difference between new and seasoned investors

Without even asking, I can often tell whether I am speaking with a new or seasoned investor simply by the conversation.

Seasoned investors tend to think, act and ask questions that are logical and numbers-based. They ask questions like, “What cap rates can I expect from this investment property?” or “What is my rate of return?”

When I am speaking to people who are new to investing, they tend to talk more based on emotions. They will ask things like, “How much money can I make on this property?” or make statements like, “I want a cheap property.”

Any seasoned investor will tell you there is no place for emotions in real estate investing. The best and often hardest thing to do is to keep emotions out and focus on the logic.

To that note, I repeatedly see five basic faulty assumptions about real estate investing.

No. 1: Get rich quick investing in real estate

You most certainly can get wealthy investing in real estate.

The pace of this wealth can even be rapid. But please do not invest with the intention of getting rich quick. The fundamentals of building wealth with any investment vehicle are to construct a strong foundation on which to build sustainable growth to the investment.

I have seen many people create million-dollar portfolios in a span of two to four years. This may be considered fast by some and slow by others. The pace at which this wealth is generated depends on the working capital you have to start, and the time and attention you have to devote to building it. It is like playing golf. It is easy, but it is not necessarily simple.

No. 2: Cheaper properties mean better cash flow

Most seasoned investors have a different take on this.

5 faulty assumptions about real estate investing blog by Larry Arth for Personal Real Estate Investor Magazine

They understand you will pay on the front end or the back end. When you pay on the front end, you can run the numbers. When you pay on the back end, it is anybody’s guess what the expenses will be.

Just yesterday I was talking with an investor who bought a property built in 1952 and rented it out four months ago. She was very frustrated. She said that each of those four months she has put two times the monthly rent (basically eight times the monthly cash flow) into unexpected repairs. Needless to say, this is not a cash-flow investment that is sustainable.

She discovered what I am always stating: “a pro-forma report may look great on paper for a cheap house, but it typically lacks sustainability.” Assuming she has no further repairs, it will be 32 months before she starts to generate positive cash flow. Cheap properties may produce cash flows that look great based on a percentage. Even a large percentage can represent small dollars when it is based on small dollars.

No. 3: Save big bucks by doing it yourself

When I first started, I too subscribed to this philosophy.

Later I discovered the lessons that seasoned investors have learned. To be good at anything requires many months of experiences, and those experiences often are costly lessons.

Hiring professionals like contractors or property management companies or perhaps an attorney to draft a special lease designed for you and your investment objectives should not be considered a cost. Instead, it should be considered a great investment – one in which you may spend money but which provides better overall value with optimum efficiency. Meanwhile, this keeps your time free to optimize your income from your profession or by investing in more property.

No. 4: Buying close to your home

I too once fell for this mindset. Wow, what I have learned over the years!

While it makes sense to want to look at your property and keep an eye on it, there are other factors to consider. Real estate is all about location. Why would I automatically think I live in the best location to invest?

I then thought about the fact that people who invest in stocks and mutual funds do not have to go the IBM plant or the 3M Company to watch over their investments. Since a skilled professional should be managing the investment, I came to realize I needed to invest in the best markets.

This was a great discovery, and I learned this is how seasoned investors do it.

No. 5 : Following every single investment and project

This one spooks me the most for new investors.

It is a sad truth that when new investors talk to me about a project, the next conversation is about a better project, and yes, the next conversation after that will be about an even better project. These investors are chasing the next shiny new object and rarely ever end up buying any investments.

They are so convinced there is something better out there that they miss the growth of all the investments. This is why I always suggest you have an investment objective mapped out completely, in writing, so you know exactly what you want and where to go to get it.

Then, the only projects you will find are the projects you are looking for.

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