What’s one thing many wealthy people have in common? Real estate investments. According to a Gallup poll, real estate is the most favoured asset class among the wealthy, surpassing stocks, bonds, and gold. Why is that? Because real estate offers many benefits that other investments don’t, such as consistent cash flow through rental income; capital appreciation which serves as a hedge against inflation; tax advantages; and portfolio diversification.
Despite these benefits, however, many people remain on the sidelines, held back by misconceptions about real estate investing. Below, we debunk five common myths that deter people from tapping into the benefits that real estate investing has to offer.
Myth 1: You have to buy property to invest in real estate
When people think of real estate investment, buying and managing a piece of property often comes to their minds. They’re not entirely wrong – direct property ownership remains a core feature of real estate investment. However, there are many alternative ways to participate in the real estate market without buying property. Some of them include:
- Real estate investment trusts (REITs): These are companies that own and operate income-producing properties, such as apartments, office buildings, malls, hotels, etc. You can buy shares of REITs on the stock market or private market and receive dividends from their profits. REITs offer you exposure to the real estate market without the need to buy and manage properties. Companies like Equiton are a perfect example of this investment strategy.
- Real estate mutual funds and exchange-traded funds (ETFs): These funds consist of a mix of real estate-related stocks, such as REITs, home builders, mortgage lenders and so on. Mutual funds are bought and sold through a fund manager, while ETFs are bought and sold on stock exchanges. With these funds, you can engage with the real estate sector without dealing with the complexities of property ownership and management.
- Real estate crowdfunding platforms: These online platforms allow you to invest in specific real estate projects with other investors. You can choose from various projects, such as residential developments and commercial properties, and earn returns based on the project’s performance.
These are just some examples of how you can invest in real estate without buying property. Of course, buying property has its own advantages, such as capital appreciation, control, and tax benefits. So, if you have the money or time, you should go for it. But if you can’t afford to buy a property or you don’t have enough time to manage a property, you should consider exploring the options above.
Myth 2: Only rich people can invest in real estate
Many people believe that real estate investments are reserved for people with deep pockets, and this misconception is closely tied to the belief that real estate investment is only about buying property. However, there are investing strategies that don’t require much capital, making real estate accessible to those with limited funds or modest budgets.
Here are a few:
- Wholesaling: Wholesaling involves finding discounted properties and then assigning the contract to another buyer for a fee. This method requires little to no upfront capital because you don’t actually purchase the property. Instead, you act as a middleman, connecting motivated sellers with buyers interested in acquiring the property.
- Fractional ownership: Fractional ownership involves fragmenting the ownership of a property into smaller shares, allowing multiple investors to collectively own a property. Each investor buys a fraction of a property and shares in the rental income, profits, and potential appreciation. Because you are only buying a fraction of a property, you won’t require significant capital.
- Real estate crowdfunding: As mentioned earlier, crowdfunding platforms allow you to pool resources with other investors to finance large-scale real estate projects that you may not be able to afford on your own. As such, you can invest in properties with relatively small amounts of money, diversify your portfolio, and gain exposure to different real estate markets.
- Real estate investment trusts (REITs): The minimum investment amounts for REITs are typically lower than traditional real estate investments. Some REITs have minimums as low as $1000, and some don’t have any minimum at all. So, if you don’t have a lot of money, you can invest in a REIT.
You can also take advantage of the following financing options if you don’t have substantial funds:
- Traditional mortgages: Just like buying a home for yourself, you can obtain a mortgage to purchase an investment property. The key is to ensure that the rental income generated by the property can cover the mortgage payments and provide a profit.
- Seller financing: In some cases, sellers may be willing to finance the purchase themselves by accepting instalment payments over time or offering a lease-to-own agreement. This can be a win-win situation, as it allows you to acquire a property with minimal upfront costs while providing the seller with a steady income stream.
- Hard money loans: Hard money loans are short-term, asset-based loans often used by real estate investors who don’t qualify for traditional bank loans. These loans are typically secured by the property itself and can be obtained quickly, although they often come with higher interest rates and fees.
- Partnerships: You can also pool resources with someone who has substantial capital so that you can invest in properties together.
Myth 3: Real estate investing is highly risky
Although some people have enough money to invest in real estate, they hesitate because they think it is risky and prone to loss. Nothing could be further from the truth. While there is some risk involved in any investment, real estate is generally considered to be a relatively safe and stable investment. Here’s why:
- Tangible asset with intrinsic value: Real estate is a tangible asset that holds inherent value. Unlike stocks or other financial instruments, you can physically see and touch real estate. This provides a sense of security and stability, as the property itself has value and can be leveraged in numerous ways. Also, this quality makes properties less susceptible to market fluctuations.
- Steady income from rental payments: Real estate investments, particularly rental properties, can provide a consistent and reliable income stream through rental payments. Unlike other investments that may be subject to market volatility or fluctuations in dividend payouts, rental income can offer a stable and predictable cash flow. This income can help cover expenses and mortgage payments, and it can even generate passive income.
- Long-term appreciation: Because real estate is limited in supply and high in demand, property values tend to increase over time, especially during periods of inflation. This means that, as a real estate investor, you have the potential to build equity and see a positive return on your investment.
You can also take the following measures to mitigate the risk involved:
- Doing your due diligence: Before investing in any property, you should do your homework and research the developer, the market, the location, the cash flow, and any other relevant aspects of the deal. You should also verify any information or claims made by the seller or developer with independent sources.
- Diversifying your portfolio: Instead of putting all your eggs in one basket, you should spread your investments across different properties, markets, locations, strategies, and asset classes. This way, you can reduce your exposure to any single risk factor and balance out your overall returns.
- Seeking professional advice: If you are not sure about any aspect of a real estate investment or need help with legal or tax issues, you should consult with a qualified professional who can guide you and protect your interests. This may include a real estate agent, an attorney, an accountant, or a financial planner.
Myth 4: Real estate investing requires extensive time and effort
Some people think that real estate investing is too time-consuming and labour-intensive, requiring them to deal with tenants, repairs, maintenance, taxes, and other hassles. However, this is only true of active investing approaches. If you don’t want to be involved in the day-to-day management of properties, you can explore the passive approaches we’ve discussed earlier, such as REITs, fractional ownership, and crowdfunding.
Under these arrangements, the properties are usually managed by a team of professionals who handle the day-to-day operations, allowing you to earn passive income with minimal involvement. For example, property managers are responsible for the professional management of listed properties, so you don’t have to worry about day-to-day operations.
Even if you choose to be more actively involved in your real estate investments, there are ways to streamline processes and reduce the burden of time-consuming tasks. Consider the following:
- Hire a property manager: Property managers are people or companies who take care of the day-to-day operations of your rental properties. These professionals handle tenant screenings, rent collection, property maintenance, and other operational aspects, freeing up your time to focus on other investment opportunities or personal endeavours.
- Leverage technology: Embracing technology and automation can significantly streamline real estate investment processes. Use property management software to automate tasks such as rental applications, tenant communication, rent collection, and financial reporting. Online platforms can also simplify property marketing and tenant screening, making the entire process more efficient.
Myth 5: You need expertise to invest in real estate
Many people think that real estate is too complicated and requires a lot of expertise and experience. But the truth is that anyone can invest in real estate, regardless of their background or lack of experience. You just need to be willing to learn and seek help when needed.
Here’s how to navigate the world of real estate investing as a beginner:
- Access learning resources: The Internet contains a wealth of resources for learning about real estate investing and staying on top of industry trends, such as books, articles, podcasts, webinars, and courses. You can find information on various topics, such as market analysis, deal evaluation, financing options, tax strategies, legal issues, and more.
- Networking: You can join online real estate investment groups and other communities where people share their insights, tips, and advice. Engaging with other like-minded individuals can help you expand your knowledge, gain insights into different investment strategies, and learn from their experiences.
- Engage industry professionals: Real estate professionals such as real estate agents, attorneys, financial planners, and property managers can be valuable sources of guidance and expertise. These professionals have specialized knowledge and experience in their respective areas, and they can provide insights, advice, and support throughout your real estate investment journey. By leveraging their expertise, you can navigate potential pitfalls, make informed decisions, and maximize the potential of your investments.
- Start small and learn as you go: Real estate investing doesn’t require you to jump into complex deals right away. You can start small, such as investing in single-family homes or small residential properties, and gradually expand your portfolio as you gain more experience and confidence. Starting small gives you the opportunity to learn and make mistakes without significant financial risks.
Invest confidently in real estate
Real estate investing is one of the most rewarding and lucrative ways to build wealth and achieve your financial goals. And as we have shown you, you don’t need to have significant money, time, availability, or expertise to become a real estate investor. Real estate is also a low-risk investment option that offers stable returns.
You don’t need to limit yourself to the traditional route of buying and actively managing properties; you can take advantage of alternative passive routes that suit your budget, goals, bandwidth, and risk tolerance.
Don’t let misconceptions hold you.
