Problems with Real Estate Investments You Should Avoid

The 5 biggest problems with beginning real estate investing that most people think of, are these:

Problem #1:

Negative money flow

Many investors view compounded appreciation as the real cash builder in real estate investments. The trouble is that in order to have that improvement or growth, most people are funding it on an ongoing basis through negative money flow. Generally, as you purchase more extravagant properties, the rental returns simply do not keep pace with the property costs which means it's VERY strenuous to have positive cash flow. And for investors who try to lower their down payment like we suggested earlier, the dilemma is made worse by having higher loan payments.

Previously, to have the big payoff over time the only choice was to fork out the negative monthly cash flow, but it is not like that any more. There are creative investment methods that will let you enjoy the rewards of inflation and also remain cash flow positive.

Problem #2:

The Do it Yourself rehab trap

A lot of ambitious investors think that the path to real estate investing success is to purchase properties, repair them, then sell them again at a higher price. While that is one of many feasible tactics, very few realize that does not mean doing the improvements all by yourself.

A key to success in real estate is leverage. if you do not leverage time by hiring contractors for any renovation or repair work you will be seriously confined in your investing potential. Doing rehabs all by yourself is sure to keep your real estate investing business small.

Problem #3:

High risk

Even without thinking about your ROI (which is something you should not ever do in practice), placing a lot cash in a single venture means it's a risky proposal. An essential concept for investing in stocks is choosing your position sizes, and the principle also applies with real estate investment planning. The larger the investment in a single trade, the more you're at risk. If you've put nothing down in a venture then surely you can agree that your risk is drastically decreased.

Problem #4:

Big down payment

Generally the largest stumbling block people face when starting up the property ladder, whether as a home buyer or investor, is getting money for the down payment. 20-30% down is not uncommon, and aside from the difficulty for many people in getting this extra money, it also means the return from your investment will be considerably less. If you can get into a deal with 5% or lower down, the return on investment will shoot through the roof (just as long as it's still a favorable deal).

Problem #5:

The home owner trap

For every investor that accumulates a lot of properties, there's a point when he tends to fall in the "landlord trap." At this point the investor is so busy managing and working on what he already has, that he no longer has the time to find any more homes.

A solution for this is to outsource the property management, and although this may be the perfect answer in some cases you should factor in the significant added price as a result. Other creative solutions can be used by a beginner, that incorporate negotiation methods that see the leaseholder content to be responsible for any repair and maintenance.