The Harsh Truth About Real Estate Investing That No One Talks About

It can be a form of insanity

Real estate is a fascinating asset class.

You can buy low, sell high, and effectively engineer profits through smart renovations and good management. It’s a rare combination of incredibly assessable, and inherently valuable because there is a limited supply.

All this means that real estate investing has tons of allure. Most people focus on how simple it is to understand. And it is. The business model is so proven it literally goes back to the middle ages. As a property owner, you are providing valuable access to housing. There is nothing fancy or speculative about traditional buy and hold — instead, it’s one of the most conservative financial plays you can make while still having incredible upside potential.

It’s not all roses, however. There are some lesser-known drawbacks for investing in real estate:

It’s a fixed income (if you’re lucky)

The goal of a traditional buy-and-hold real estate investor is to generate passive income from rental property. The model is simple, and it works. The problem is the benefit of owning rental real estate is also its shortcoming.

Property owners offer annual rental agreements. These agreements give some income stability and the ability to project future profits. The downside is that in order to increase the income, spend more money on another property. In a product-based business, you simply have to sell more to generate more income.

In rental real estate, you are signing up for a fixed income.

It can be insanity

Insanity is doing the same thing repeatedly, but expecting a different result. This is exactly what it’s like at the beginning of any business, especially real estate. You work on each new project hoping the outcome is incrementally better than the last.

It’s multiple businesses in one

To be in the business of rental real estate, you are actually running multiple businesses at the same time. That’s part of what makes the simple business model so challenging.

A property owner must be proficient at acquisition, property preparation and renovation, leasing and marketing, property management, asset management, investment disposition, and portfolio rebalancing. That’s seven skills! To be fair, there are firms that focus on a single area only.

Having systems in place is incredibly important. Small operators don’t have enough volume to require dedicated staff to each of these areas. To make matters worse, they rarely do any of them with enough frequency to become a master of anyone either. The best way to address this is by having well-documented systems you can follow when the time comes. This reduces the amount of brainpower needed to perform the task.

Real estate investing is simple, but difficult. There are several sub-businesses involved that must all be managed. That said, if you understand the challenges before diving in and commit to adapting quality systems, it is a profitable and reliable source of passive income.