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Real estate investing requires a lot of hard work and proper planning. It can be a phenomenal wealth-building strategy, but without the proper set of expectations and goals, it may not be the best fit for you. I often hear people talk about real estate as this sure-thing money maker because they know a friend or neighbor or uncle who has made a fortune in rentals or flipping, and think they should jump in with both feet.
While I am an advocate for smart real estate investing as an owner of property myself, it is critical to see both the pros and cons of this investment class and make an informed decision on whether it is right for you. So why might real estate investing not be for you? To answer this, I would first have to address the expectations one should have. Real estate should not be looked at as a get-rich-quick scheme. Have people made lots of money flipping houses in short amounts of time? Of course, but there are always going to be those legendary stories no matter the asset class.
Warren Buffet would define investing as [placing capital] in productive assets, where ideally these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value. By that definition flipping is not investing; it is speculating on someone else buying your asset at a higher price. So the correct expectation a person should have going into their first real estate investment is a long term strategy which produces positive cashflow, and which appreciates alongside inflation.
The second thing to consider when assessing if real estate is the right fit are your goals. Why do you want to buy real estate? Is it because you see people making fortunes? Or because you think it is a passive investment which will pay you each month? Or because you have seen the incredible appreciation of properties during run-ups like 2003-2006 where people doubled their money in just a few short years? If your answer is yes to any of these, real estate may not be for you (with one exception in regard to the passive investment which I will touch on). A real estate investor’s goals should look something more along the lines of “I want a second stream of income, while hedging inflation and building equity in the property through the principle payments on the mortgage over a long-term period.” This goal should align with your expectations. I have heard goals such as “I want to make better returns on my capital than paper assets can offer, and want to store wealth in appreciating properties for retirement.” That is a fantastic goal which absolutely qualifies you to look deeper into real estate. In regard to real estate being a passive investment, it really is only truly passive if you invest in Real Estate Investment Trusts (REITs) or some other type of fund where you do not have direct control over properties. Directly owning rentals can be very nearly passive if you hire a professional property management company to take care of maintenance, leasing, collections, and other such not-at-all passive duties, but you should not have the expectation of doing nothing but sitting back and collecting checks. Property managers still need to be managed!
With all that said, I absolutely do not want to discourage anyone from considering real estate as an investment. But it needs to be looked at as just that; an investment. Your expectations must be reasonable and your goals must match those expectations. If you can check both those boxes, I would highly recommend taking the next steps and getting yourself educated in the subject.
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