The percentage of the investing public enamored by real estate investing in extremely high. The number of books, seminars, and the like describing how to get rich investing in real estate is at least partial evidence of this claim. Though there are many and varied ways to invest in real estate, almost all of these focus on buying houses, duplexes or other housing units and renting them out. Unfortunately, this is arguably the riskiest, and arguably the worst of all real estate investments. If those risks were understood, and if the alternative real estate investments were better understood, the majority of the investing public would opt for lower risk alternatives. My intention is to expose residential real estate investing for the high risk investment vehicle it is, and to explain alternatives that are superior in almost all regards. Stay tuned for my next post highlighting reason #1 that investing the way most of these programs suggest is so incredibly risky.
February 7, 2009
February 26, 2009
Reason #3: You can lose more than 100% of your investment
Right now the risks of the stock market are very evident. That said, nobody who has invested money in the stock market has lost more money than they put in. If they invested in a broadly diversified portfolio of stocks at the peak, they may have lost around 50% (as of this writing). Whereas that is not good, it is a whole lot better than what anyone has done who bought rental property at the peak with 5% or 10% down, and subsequently has watched residential real estate prices plunge by 20% or more. In other words, if you invested $20,000 to buy a $200,000 rental property (10% down), and that property has lost 20% of its value (a conservative estimate of the average drop across the nation), you now own a property worth $160,000 and you owe close to $180,000. You’re now sitting at negative equity of $20,000 (not counting the commissions you would have to pay to sell the property). So you’ve effectively lost your entire investment of $20,000 plus another $20,000.
February 21, 2009
Reason #2 Residential Real Estate is So Risky: Need For Hands on Involvement
With many investments, the management of that investment is left up to seasoned professional managers who do this day in and day out as part of the job. When you buy your first rental income property, you are stepping into that role with either no experience or at least, in most cases, much less experience than the managers of most investments. Overnight, you become a landlord with all the inherent headaches. Those headaches include plumbing problems, tenants not paying or paying late problems, property maintenance responsibilities… Of course you can hire a professinal property manager to take over that role. Regardless of whether you do it yourself or hire a management company, when you are forecasting revenues and expenses, you must put a dollar figure on the performing this function (your time is worth something too). When you do so honestly, you will be adding cost of between 5% and 15% of the total rental income potential to your cost. Your return potential after making this adjustment inevitably drops considerably. There are many other ways to invest in real estate where those costs are well known and already accounted for that don’t require you to wear both the investor hat and the landlord hat. We’ll get into that after we’ve identified other risks of investing in residential rental income properties.
February 11, 2009
Reason #1 Residential Real Estate Investing is so risky: Lack of Liquidity
The best contrast to the lack of liquidity in the residential real estate market is the high level of liquidity in the stock market. Whereas investing in the stock market has its share of risks, at least it enjoys being a highly liquid investment. If I want out of a stock, and provided I’m not invested in some obscure stock, I can get out almost immediately. Furthermore, I can always see what the bid price is, and for immediate execution, I can sell at the market bid price. If I’m invested in a stock mutual fund, I can get out at the end of that day at the ending price of the fund on that day. Contrast that to residential real estate where there is no up-to-date pricing mechanism, and nobody bidding for my property until I go through a number of time consuming processes (search and find and agent, get it listed, get it advertised,…). In good times I may find a number of bidders in a matter of weeks, but it bad times it may take months to get a single bidder. That bid always comes with strings attached that make it impossible to know I’ve actually got the property sold until it actually closes. To offset this lack of liquidity, an investor needs to demand a low enough price to better ensure an adequately high return. Stay tuned for reason #2.
