Some people have seen negative or distorted stereotypes from television shows about home flippers and landlords, and they believe that all real estate investors are just like the ones on the shows.
I have seen very few of these shows that accurately portray the reality of what investing is all about.
Here’s a list of some of the more glaring misconceptions about real estate investing and the people who are earning a living or building wealth for retirement from their real estate investments.
Let’s take a look at these misconceptions and contrast them with the facts.
1. All Real Estate Investors Are Rich
Yes, attaining wealth is the dream for most real estate investors, but it doesn’t happen overnight. It can take many years of hard work and commitment for our material goals to reach fruition.
Many tenants believe their landlords are rich simply because they own one or more properties, and some even justify not paying their rent because “that rich landlord doesn’t need the money.”
In reality, just because someone owns a rental property doesn’t mean they have 100% equity with no mortgage. If a landlord owns three homes with mortgages, and each property has $25,000 in equity that hardly makes the landlord rich.
After taxes, insurance, and homeowners association dues, the monthly cash flow is usually only a few hundred dollars, and that money is usually earmarked for repairs or vacancy periods.
2. You Need a Lot of Money to Invest in Real Estate
While it’s true that conventional loans usually require 20% down to buy investment property, you can also begin your real estate investment career by purchasing a home as your primary residence for zero down with a VA or USDA loan or only 3.5% down with an FHA loan.
Then, after living in the home for only a year or two, you can buy another property to live in and rent your primary residence. In that way, you have legally bypassed the usual larger down payment needed for purchasing investment property.
If you want to try your hand at flipping a home, you can get a hard money loan, which typically lends the investor 65-70% of the after repaired value (ARV) of the home.
If you can buy the property cheaply enough, you may need little to no money out of pocket to purchase or rehab the home.
3. Real Estate Investors Are Unethical
Real estate investors gained a bad reputation after the housing market collapsed in 2008. The media wrote numerous stories about unscrupulous investors who conned lower-income consumers into buying remodeled homes without advising them to conduct home inspections.
There were allegations that investors were painting these homes and installing new carpet, but not fixing leaky roofs or upgrading faulty electrical or plumbing systems, and the homes were actually money pits.
Investors were also accused of being “in cahoots” with unethical appraisers to artificially inflate property values.
Of course, there were some bad apples just like any profession, and many of those investors faced civil and legal battles for their actions. But the vast majority of investors I make contact with on a regular basis make sure good, professional work is being done on their homes.
In addition, changes made to the appraisal system a few years ago now mandate appraisers to be chosen at random from a Centralized Appraisal Service. So it’s now far less likely for investors to enter into unholy alliances with appraisers.
4. You Have to Know Someone on the Inside to Find Really Great Deals
There are several ways to find really great real estate deals, and none of them involve back room deals, meeting with bank Presidents, or shadowy tips from insiders.
Today real estate investors find good deals at the county auctions or at online auction sites such as Auction.com.
Rick Sharga, Executive Vice President of Ten-X, an online real estate marketplace that operates the Auction.com website says, “The auctions on our site are transparent, open to the public, and everyone has the same equal chance to win the bid on each property.”
Other investors find homes through road signs or postcard marketing. They are commonly referred to as the “We Buy Houses” investors.
The homes they purchase are usually distressed sales where either the owner has died or has equity in the home but can no longer make their loan payment.
The third way that investors typically find homes is through their local Multiple Listing Service (MLS).
These homes tend to be a little more expensive than those found in auctions or through private distressed sales, but often need fewer repairs and may have less competition. The best ones are usually bank foreclosures or short sales.
I recently bought a town home through a popular auction site. The home was originally listed for $51,100, but over the next 10 weeks the price was dropped three times until it finally reached $39,800.
The starting auction bid was $18,000, and I hit the reserve (minimum price the seller will take) at $24,000 and won the bid.
The property needs only a few thousand dollars of remodeling and should be worth about $65,000 when it’s finished.
Who needs an insider to find a really good deal?
5. Tenants Calling for Repairs At All Hours of the Night
I have to laugh when I hear people say this about landlording because in 20 years of owning rental property, I’ve rarely had calls from tenants after 5 PM.
One of the ways I minimize these calls is to examine the home thoroughly when I buy it or after a tenant moves out. I have all of the issues taken care of before renting the home.
Happy tenants take better care of my properties and pay their rent on time. The last thing I want to do is inconvenience them with non-working heating and air systems, water heaters, or leaky toilets and faucets.
I hope this clears up some of the misconceptions and helps real estate investors understand why people say such strange and unrealistic things when we tell them what we do for a living.