There are many common misconceptions about real estate investments. A lot of millennials believe home ownership is out of reach for them, or that real estate investment is just a privilege for the rich. I completely understand and I know how hard this process can be. I started out not having a lot of money years ago, and slowly built my portfolio to over 5 million dollars worth of real estate. I also built a professional property management team to help my clients manage their properties. I learned a lot, and I’m sharing my experience to help others achieve financial freedom.
5 common myths of real estate investment:
Myth 1: You need a lot of money to invest
Myth 2: Buy low, sell high is the only way to make money
Myth 3: Timing is everything
Myth 4: It is always risky
Myth 5: Properties are always hard to manage
Myth 1: You need a lot of money to invest. Is this true? If you buy a home at $400,000 and put down 5%, all you need to save up is $20,000. I have helped people buy with just 5% down. The average rate of inflation in recent decades is about 2% annually. If your home just goes up 2% to keep up with the inflation, that’s $8000 of appreciation. A $8000 return on the initial $20,000 invested is a 40% return on invested capital. That number easily beats many investment products out there with under 10% return. Not to mention, many homes tend to appreciate more than 2% on average. The return is even higher if you can identify value-add opportunities. For example, in one of my last projects, I increased the rental yield by 50% by doing renovations and adding bedrooms to increase the occupancy capacity. Of course, we have to subtract the maintenance costs and management costs if you hire a property manager. However, these are the rough numbers in general. I would say, in general, if you can get at least a 10-20% return on your cash invested, you are beating most investment products out there due to your use of leverage. And real estate investments tend to be considered relatively low risk, especially residential multifamily in areas with robust economies. We all need a place to live, and the right locations tend to attract steady demand historically. Focus on areas with low inventory and limited supply to prevent downward pressure on prices. Many neighborhoods in the greater Boston area are ideal for that.
Myth 2: Buy low and sell high is the only way to make money? A lot of people have used excuses like “we are at the top of the market and therefore we shouldn’t invest in real estate.” The truth is, I have heard people say that to me about the Boston market since around 2012. And the market has gone up on average 50% since then. So many people who said that and did nothing have lost out on hundreds of thousands of dollars of potential profit from the appreciation and the rental income, not to mention the tax deduction opportunities from the mortgage interest up to $750,000. I have also seen people wait, and then see the market going up, and finally they got sick of waiting, and then bought a home. They still made money. Let’s widen the horizon by 20 years. People felt the same way about the market being at the peak in 2007. And we all know that prices in 2007 are low compared to now, even though there was a crash between 2008 and 2012. Most real estate markets recover within 3-5 years. Many areas in Boston dipped minimally at 5-10% and recovered within 1-2 years. That was when stocks went down 50% in general. Even if you looked back on the markets in the 90s, you see highs and lows and seasoned investors buying during highs and lows. Investors make money regardless of whether the market is at the peak or not, when they use the right strategies!
Myth 3: Timing is everything? Is timing everything? When the market is at the bottom, a lot of people say we shouldn’t invest because the market is risky. But then when the market goes up, they say we shouldn’t invest because prices are too high. With this logic, we should never invest at all? Is the true? The truth is, no one can predict the future, however, and not doing anything with our savings guarantees losing money due to the average 2% annual inflation. Money sitting in the bank ultimately becomes less valuable. And historically, real estate has served well as an inflation hedge over hundreds of years. When we invest in real estate, we need to have a long-term perspective and treat it as a source of passive income. There are so many opportunities in real estate to add value by leveraging different renovation strategies to increase the return.
Myth 4: It is always risky to invest in real estate. There are risks with all kinds of investment products. Nothing is 100% risk free. Not investing, is a risk itself, because as we discussed, we lose money by default when we don’t invest, because of the average 2% inflation when the money is just sitting in the bank. It is true that A lot of retirees lost a lot of equity from their stocks during the last crash. Some lost as much as 50%. However, in real estate, there is more than one way to control risk, and it is much easier than you think. For example, the real estate market is a lot less liquid than the stock market and a lot of times homes move a lot more slowly. It takes time for the home owner to clean up their house and for the realtor to stage it and put the home on the market for sale. Selling a home is not as easy or fast as selling stocks. Even in seller’s markets where homes sell within a week, it takes 7 days for a home to go under agreement after an offer is accepted. This creates opportunities for us to do our due diligence about the market and the home as an investment. Most of the time the risks can be controlled or mitigated by doing pricing analysis and identifying value add opportunities. Many properties sell at lower prices because the tenants pay under market rent for properties that may need a lot of work. Professional landlords like to buy these properties, find opportunities to improve the properties, make them more livable, bring the rent back to market value, and refinance to pull out their equity after the value increases. This strategy is how I ended up buying 8 units in an area with a strong rental market, even though I didn’t have a lot of money starting out as a millennial. I now own 5 million worth of real estate in the greater Boston area.
Myth 5: Properties are always hard to manage? I have heard this objection from not just people who don’t invest in real estate, but landlords who have been in the business for decades and haven’t figured out a way to manage their properties efficiently. Many landlords manage the properties themselves directly, take phone calls from tenants and deal with headaches when things don’t work out. The truth is, you have to treat real estate like any business. A business can’t grow if you can’t scale or spread out headaches with teamwork. Bill Gates didn’t become rich because he was his own receptionist or his own door man. Steve Job didn’t become a billionaire because he managed all the engineers himself. Why should real estate be very different? Why should property management be a one-size fit all operation? Just like the operation of Apple works very differently than Samsung, a property management team in one area might look very different than the team in a different area. But the key is to scale the business. I have built a property management team to grow my real estate portfolio to over 5 million dollars, and to manage my clients’ portfolio over multiple millions. I have figured out a system to run the business efficiently and to prevent property managers from getting burnt out, and to build friendly relationships with tenants to minimize business costs. There are many things we can do to scale a property management business to achieve financial freedom, and provide a good quality of life for tenants and team members.