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The Myth of Passive Real Estate Investing

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My financial planning company focuses on serving clients in their 30s and 50s. And we see first-hand how popular the idea that real estate is a (relatively) quick way to get rich. If real estate is a simple passive income maker, as many think so, that’s fine. The problem is that the story doesn’t match reality.

In real estate can A good investment, the statement comes with a list of warning laundry.All the “ifs” and “buts” that surround it are for most people who simply want an easier and more exciting way to invest in real estate (especially for the purpose of generating passive income). Grow wealth more than it means to be a myth rather than a viable strategy Invest in the stock market in the long run Use a diversified portfolio.

Don’t worry about actually making a profit before joining the ranks of new real estate “investors” who understand how much skill and luck you need at the break-even point alone. First, consider the following real estate investment-related realities.

1. Managing rental properties requires a lot of work

When people tell me they want to invest in real estate, the scenarios they usually imagine are: They receive a rent check on the first day of every month. This is much larger than a real estate mortgage payment. Then use the check to pay your mortgage, cover all the costs of owning a home, and put your profits in your pocket.

You can find, buy and manage rental properties that realize this dream scenario. But it’s not for everyone, and it’s not as passive an attempt as many would imagine.

Unless you’re ready:

  • Find tenants and advertise to avoid vacancies.
  • Show your property to stakeholders when looking for a new renter and help maintain it for your current resident.
  • Seek the applicant to a veterinarian to make sure they have a qualified and trusted tenant.
  • Consistently update and improve your properties so that you can continue to attract high-paying renters.
  • Respond to maintenance requests and coordinate repairs in a timely manner (or do it yourself).
  • Manages all financial obligations, from invoice payments to security deposit processing.

… Playing the landlord may not be the ideal role for you. All of this takes serious time and effort, which is exactly what you can plan for. Ask veteran real estate investors who manage real estate with their tenants about a list of unexpected obligations, they are repairing well over budget, eviction and entanglement with the court system, or other rentals-wrong Tell you about the horror story.

Of course, you can just outsource your headache and use a licensed property management company. This is a viable option and an option used by many serious real estate investors. But with that in mind, there is even less room for profit. Standard property management fees can run 10% of your monthly rent..

Compare all of this to investing in a market where you may not need to do any work if you set up automatic contributions to your investment account that run on the same day each month.

2. Just because it’s a home doesn’t mean it’s a good rent

Again, this is not to say you you can’t Make money by buying real estate and renting real estate to earn rental income. It’s not a myth.The myth is that Anyone You can do this Any Real estate they buy and offer for rent.

Unfortunately, it’s not that simple.Learn to evaluate your investment Possibility of rental property It’s a lot more complicated than most people would think of buying a single-family home that they live in personally.

There are some simplified expressions like this 1% rule — This suggests that the rent that can be collected from a rental property must be equal to 1% of the purchase price of that property. This is too generalized to be a strict rule for success.

This is especially true for the unusual real estate market as seen in the last two years.Bloomberg recently entered the third quarter of 2021 Median real estate investment properties were $ 438,770.. Using that 1% rule, you would have to charge $ 4,400 per month for the property’s rent. Most markets do not support such rents for medium-sized single-family homes.

And that’s a simplified calculation. Other factors that need to be properly valued are not taken into account before deciding whether a particular property is suitable for investment. Yes, you can buy a home over $ 400,000 and rent it. But if the overall idea of ​​real estate investment is that you make a profit, you may face a difficult battle to make it happen. Again, this emphasizes the fact that buying real estate is not a fast and easy cash ticket.

3. If you really want to invest in real estate, you probably don’t want to live there yourself.

Napkin math to determine what works with rentals also doesn’t take into account the scenario we’re looking at. Many I talk when many people want to invest in real estate. What they really want is to buy a villa, use it for part of the year on their own, and rent it out when they’re not personally using it.

What they do not consider is the fact that the homes they personally want to live in or use are likely to be much more expensive than the homes that real estate investors would consider buying. The higher the price of a house, the harder it is to actually achieve a positive return.

And although vacation rentals can be a vibrant business, you If you want to use your own home during peak season, you will have a hard time renting a home at prime price, filling vacancies during off-season, or both.

Don’t forget to watch the rent payment come in No Equivalent to automatic profit.To determine if you are really making money on a property that is equal to or better than what you can expect Diversified portfolio invested in mutual funds and ETF arrays, You need to calculate the total internal rate of return. This needs to be considered. all The cost of owning a home, as well as the top-line numbers on your mortgage statement.

4. Buying real estate can distract you from your actual goals

Many clients want to consider buying real estate as a way to increase their wealth until I ask a very simple question. What is really about managing a portfolio of rental properties? I want do?

In a tough career and growing family, most of our clients end up with hundreds of thousands of dollars begging for plenty of time, energy, and spending to buy another home. It’s floating. Managing the role of a landlord or handling a relationship with a property management company is usually not what most people want to undertake. It has nothing to do with the values, priorities and goals they have stated.

In fact, buying real estate requires a lot of capital, which often undermines other goals. If it leaves you underfunded and unable to invest in the market, it can also move away from the overall long-term investment strategy.Remember, you can invest in real estate finished Market to go through REITs or real estate investment trusts..

Only you can answer whether committing to a real estate portfolio is a good use of your time and money, and whether it is worth stealing money from other goals to fund this effort. increase.

5. Real estate investment requires a team of talented professionals

Bloggers and podcasters tend to make real estate investments sound simple at first glance, so it’s easy to think that you can handle everything yourself. However, in reality, real estate investment is complicated. Legal and financial dynamics are working and you will need to help a trusted team of professionals protect yourself and your investment.

We live in a litigation-satisfied society and it is important to protect yourself and your property from potential responsibilities. Knowledgeable insurance brokers and trusted real estate lawyers are indisputable for real estate investors. If something goes wrong with your tenant or your property, you will want to put these people in your corner.

The financial status of real estate investments is not the same as the financial status of individuals. Therefore, having a skilled accountant, tax expert, and financial adviser on the terrain is also an important component of a well-anointed real estate investment machine. Building and fostering such relationships is critical to the success of new real estate investors.

Real Estate Investing as Passive Income: Know What You Are In

Yes, real estate investment can It is profitable and may be able to provide passive revenue at some point in the future after spending a lot of effort on the front end. But it’s far from a guarantee, and it takes a lot of luck and skill to achieve the result.

What is real estate investment? No Is a quick, reliable, easy and reliable way to make a big profit on your first purchase.

Unless you are very passionate about investing in real estate and are willing to spend time, energy and money on such a large project, you will probably be better. Build assets in other ways.. Otherwise, it’s too easy to notice that you’re working hard towards the break-even point at best.

In all large financial businesses, it is best to be informed. Maybe the trade-offs are worth it to you. As long as these trade-offs apply to the big picture, it’s great. In any case, when you know the truth that real estate investment is rarely passive, you will at least know what you are working on.

Beyond the founder, hammock

Eric Roberge of CFP® Beyond your hammock, A financial planning company operating virtually nationwide in Boston, Massachusetts. BYH specializes in helping professionals in their 30s and 40s spend money as a tool to enjoy today’s life while responsibly planning for tomorrow.Eric has been named one of Investopedia’s Top 100 Most Influential Financial Advisors since 2017 and is a member of the 2016 Investment News 40 Under 40 class and the 2021 Think Advisor Luminaries class.

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