Real estate investing is full of misinformation. So today, the experts here at Gatsby Investment are exploring the top 10 real estate investing myths…and busting them with the facts.
Top 10 Real Estate Investing Myths - BUSTED!
Myth #1. You Need a Lot of Money to Start Investing
Fact: Many successful real estate investors start with strategies that don’t require much money.
Real estate investment trusts (REITs): REITs are companies that invest in income-generating real estate and share the profits with investors, in the form of dividends. To invest, you simply buy a share of your chosen REIT, which can often be found for under $1,000.
Low-minimum real estate crowdfunding: Crowdfunding is when investors pool funds to finance a specific project or portfolio. Some platforms allow users to buy into a deal for under $500
Real estate mutual funds: Real estate mutual funds invest in industry-specific assets like REITs and stocks in real estate-based companies. Some mutual funds have no minimum investment requirement while others require at least $500-$5,000.
Myth #2. You Must Be a Landlord to Make Money
Fact: There are many ways to make money in real estate without being a landlord.
Private equity: Private equity is the general term for partnerships between private parties specifically to buy assets, manage them for a period, and then sell them. These opportunities are not made public, so you need to have connections (and often a lot of capital) to join a private equity venture.
Hard money loans: Hard money loans are a form of short-term funding, issued by private lenders rather than banks and secured by collateral. For example, if you know a house flipper who does not qualify for traditional financing, you can issue a hard money loan to the flipper in exchange for a higher interest rate than a bank would charge.
Real estate syndication: Syndication is very similar to crowdfunding, the key difference being that syndication offers a more stable legal ownership structure. With syndication, you are made a limited partner in the deal, securing your ownership interest in the underlying real estate.
Myth #3. Flipping Houses Is Quick, Easy Money
Fact: Under the right market conditions, flipping houses can return as much as 15% in as little as six months. However, a successful flip requires access to deals, connections to vendors, intensive project management, high upfront costs, and extensive market knowledge.
If you don’t have the time, skills, knowledge, and network, house flipping can be disastrous. Even industry giant, Zillow, lost a reported $880 millionin failed house flipping because it mistakenly believed house flipping was easy money.
If you want to invest in flips, but don’t have the necessary experience or resources, work with a proven real estate crowdfunding or syndication platform on a pre-vetted flip project. You can leverage their experts and systems for a more successful flip than you could achieve alone.
Myth #4. You Should Always Buy Rental Properties in Your Local Area
Fact: The best investment properties might not be in your backyard. Expanding your search can help you find better deals.
We understand why investors like to choose properties close to home. When you live nearby, you can keep an eye on the property. You might even be able to handle many of the real estate investor’s checklist items (like maintenance and leasing) yourself.
Geographic diversification. Spreading your assets across multiple areas provides some protection for your portfolio in the event that one local market underperforms.
Flexibility in choosing property types. Perhaps your local market is all single-family homes, and you’d prefer to invest in condos or multi-family buildings. Other markets could have more inventory in the property type you’re interested in.
Higher cash flow potential. Some markets offer higher rental rates compared to purchase prices than your local market.
Increased appreciation potential. Some markets see faster property value growth than your local market.
Scarcity. Land is limited, and the housing supply in the US is perpetually low.
Tangibility. Unlike financial securities, real estate gives you a tangible asset.
Multiple exit strategies. If market conditions change, you can switch up the exit strategy on an investment property. For example, if current market conditions aren’t favorable for selling, you could pull out your equity to free up some cash while holding the property as a rental until conditions are better suited to selling.
At the same time, failing to invest is usually riskier. Saving money instead of investing it might prevent you from losing capital, but the money you save will be losing its value to inflation. For example, if inflation is 3% this year, every dollar you had in savings at the beginning of the year will only be worth around $0.97 at the end of this year. Over time, inflation continues eroding the value of your savings. That’s why it’s so important to invest, despite any inherent investment risk.
Myth #6. You Need to Time the Market Perfectly to Succeed
Fact: Perfectly timing the market is a matter of luck. Instead of trying to time the market, make the most of whatever current market conditions you find yourself in.
Unless you have a functional crystal ball, you can’t expect to time the market. Instead of waiting for “perfect” market conditions (which are only visible in hindsight), take advantage of what’s working now, while also keeping the long-term in mind.
You might, for example, buy a rental property for long-term appreciation, tax breaks, and rental income. Even today, when interest rates and property values are higher than we were used to in the 2000s and 2010s, real estate is still growing in value. It’s also possible that interest rates could continue rising, making today’s 7% look favorable by comparison. However, if rates go down in the future, you can refinance to get the lower rate. You could even choose an adjustable-rate mortgage (ARM) so interest rates will automatically change with the market.
Myth #7. Investing in Real Estate Always Provides Passive Income
Fact: Passive income is incredibly valuable and can be found in real estate, but many forms of real estate investing require active involvement.
Direct property ownership (being a landlord) often requires more time, effort, and skill than people realize. Finding and screening tenants, showing units, collecting rents, enforcing leases, addressing complaints, resolving maintenance requests, renewing leases, turning units for new renters…it all takes a lot of time. And that’s after you’ve done the work to find and secure the right property and prepare it for the rental market.
However, passive income from real estate is well worth seeking out! Passive income frees you up to focus on pursuits of passions. So if you’re serious about making your real estate investment income passive, gather professionals to handle the details for you. You might, for example, hire a property manager or invest in a real estate syndication project managed by an experienced team of experts.
Myth #8. Real Estate Always Appreciates in Value
Fact: While real estate generally increases in value over time, economic factors can lead to temporary depreciation.
The Housing Market Collapse of 2008 is an extreme example of housing depreciation. It’s also a prime example of the resiliency of the property market. In Q1 2007, the median sales price in the US was $257,400. By Q1 2009, the price was down to $208,400. It took until Q1 2013 for the market to recover to Q1 2007 values. And, as of Q4 2024, the median home price has skyrocketed to $419,200.
The moral of the story is that large-scale depreciation is possible, but it is temporary. As long as you can ride out any market downturns, the value will return, even if it takes several years.
Myth #9. It’s Impossible to Invest in Real Estate If You Have Bad Credit
Fact: Good credit makes it easier to find favorable financing for purchasing real estate investment properties. But between creative financing and real estate investment strategies that don’t require buying property, you can absolutely invest in real estate, even with bad credit.
If you want to buy an investment property, but don’t have good credit, consider alternative ways to finance real estate investments, including:
Private money lenders: Private individuals willing to fund the deal in exchange for a higher-than-market interest rate.
Seller carry-back financing: When the seller acts as the lender, collecting monthly installment payments rather than the full purchase price upfront.
Crowdfunding: when you raise funds by allowing the public to invest in the project.
Investors with poor credit can also consider any of the ways to invest in real estate without buying property as outlined in Myth #2 above. This can buy you time to improve your credit score while you enjoy the benefits of real estate investing.
Myth #10. Paying Off Your Mortgages as Soon as Possible Is the Best Strategy
Fact: If your mortgage interest rate is lower than the rate you can earn by investing, you’re better off sticking to the repayment schedule (or even cashing out some of your equity) than paying down the loan faster.
Instead of paying off a low-interest mortgage, investors often reinvest capital into new properties. Furthermore, some investment strategies rely on cash-out refinancing to recover the initial capital so it can be reinvested into another property. With the BRRRR method, for example, investors buy a property, renovate it, rent out the unit(s), structure a cash-out refinance based on the property’s new higher value, and repeat, using the cash-out from the refinance as the down payment on a subsequent property.
Get the Facts with Gatsby Investment
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Don’t be fooled by the common real estate investing myths circulating online. Get the facts from the trusted experts at Gatsby Investment!
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