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5 Big Drawbacks Of Rental Property Investing
If you have just entered the world of real estate investing, you might have heard everything good about properties.
- allows you to easily exploit financial leverage
- deposits rental income into your personal bank account recurringly
- help you accumulate wealth with value appreciation and equity growth
- landlording can be outsourced leaving you time to sunbath on the beach
In fact, if you attend one of those highly charged weekend seminars claiming to teach the average individual how to be a real estate millionaire, you’d pretty much think that this asset will do everything for you except cuddle you to sleep.
But what people seldom talk about are the difficulties that come with rental property.
That’s hardly surprising when the sales revenue of “experts” are dependent on newbies maintaining the mindset of real estate being all-conquering.
This is a big reason why new investors fail… because they were never prepared for the problems and challenges that await them.
Well… at least the “experts” and promoters are not complaining as they have most likely sold these newbies the “next big thing” in real estate and collected a nice commission for their efforts.
Here are 5 big drawbacks of rental property investing.
1) Rental property is a long term play
Anyone marketing rental property as a get rich quick investment is lying through their nose.
Yes you can very well get rich fast with real estate, but not in the world of rental, landlords and tenants. Those types of opportunities are not available to the average person like you and me.
And even if such an opportunity fall on your lap, you might not even have the financial muscle to reel it in.
Rental property without doubt can give you financial freedom… but it will take years before it can make the average person wealthy.
Assuming you are starting off part-time, it might even take years before you can quit your full time job and rely solely on your properties to generate income.
To avoid stagnation of your asset portfolio, I suggest that you set progress targets each year to meet so that you can ensure you are gradually taking steps towards the ultimate goal.
If you are moving forward every quarter, it doesn’t take an Einstein that you will eventually attain your goals.
What you goals should be… depends on you and you alone.
2) It can consume your life
Ever have that insurance agent friend who talks about insurance every time at a social function?
You could become just like him. Just that your topic of interest is real estate.
When someone talks about how he has an extra room that he is using as a store room, you start telling him about how much opportunity costs he is giving up and goes into teaching mode in advising him how to extract maximum rental out of it.
When someone casually mentions that he has a friend from out of town moving here, you will probe like a salesman smelling blood and try to sell your vacant rooms and apartments for rent.
And when everyone are having fun just socializing with each other, you will be think about that run-down house that caught your eye when you drove by earlier. It could make a great fixer-upper!
You just cannot help thinking about houses and tenants. You might call it passion. Other will call it an obsession. Whatever.
Vacations will be no more unless you have third parties managing your properties for you. And if you do take a leap of faith and go on vacation anyway, you will be constantly be worried every time your phone rings… anticipating another complaint from a tenant that requires immediate attention.
The only real way to free yourself from the shackles is to hire a professional management company to handle all the ins and outs for you.
But is your business big enough to afford them?
3) Dealing with tenants and others
Sometimes new graduates misunderstand the job that Human Resource does in a corporate environment and feel that it could be kinda fun to hire and fire employees everyday.
It is only when they first step into the HR department when they realize that it’s one of the craziest places to work in.
If you think that managing tenants is just about being there to collect rental when the time of the month arrives, and just answering calls out of courtesy, you have a huge awakening coming.
One that might leave you petrified.
Although people are living in a house that legally belongs to you, you will not be able to call the shots like a CEO to his staff who depend on his appraisal for their annual bonuses.
If anything, you are more like an attendant for room service.
If you absolutely hate dealing with people, this business is not for you.
Don’t get me wrong. You don’t have to love dealing with people to excel in real estating. But loathing it will leave you living a miserable life.
And that’s not just the tenants who insist on keeping a pet when you have explicitly disallowed it, or the one who sprained his ankle from an uneven tile in the kitchen seeking compensation and damages.
It’s also about dealing with contractors, service providers, vendors, suppliers, etc.
If you think that being the owner of the house makes you the one calling the shots by default, you have another damning realization coming.
These third parties are businesses who have their own goals and objectives in mind. They don’t really care about your problems and targets. In fact, they know that they have a a certain power since what they do affects the mood of tenants. And unhappy tenants will lash out on you instead of them.
And there’s the catch 22. Do you hire and lose some of your control? Or do you do everything yourself and let the house own you?
You’d think that with real estate, people will intuitively know about the ton of paperwork that needs to be up-kept in order not to run into trouble with the law.
Yet most people first getting into this business are overwhelmed by the amount of time they have to spend on documentation.
- Legal papers
- Accounting commitments
- Forms for operation management
- Administrative filings
- Tax planning
Someone who is bad at keeping these things in check can get into real trouble one day. And when you are running a proper legitimate business, being uninformed is not an excuse.
5) You can actually lose
No investment is 100% profitable. That goes with rental property as well.
This is a topic that many gurus leave out from their $1,000 weekend workshops.
Imagine committing yourself full-time into this and emerging 3 years later with a $150,000 hole in the bank. That’s not as far fetched as it sounds.
Just take a look at 2008 and you will know exactly what I mean.
But there are many steps you can take to minimize your risks. For example:
- Keeping a healthy cash buffer for emergencies
- Buying insurance
- Getting credit facilities as a backup plan
- Carving out a niche in the type of tenants you reach out to
Success is what we seek in rental real estate investing. But don’t ignore the possibility of failure. Doing which can blind you from things you can do to protect yourself when everything goes south.