The most common objection I hear about real estate investing is that it’s too risky. But why do so many people think that? What’s their reasoning? Is there any merit to their words of caution about it?
THE INDIRECT BAD EXPERIENCE
Sometimes people think real estate is risky because they have a relative or a “friend of a friend” that had a bad experience and lost money with a rental property. Their negative reaction is often based on one case study! Not only is it only based on one story, they probably don’t even know the real reason behind why it was a bad experience. At most they might say that their friend had a “horrible tenant” and/or that they “lost of money”.
Dig in and find out the real answer. The real answer will almost always be a deficiency of the person such as:
The “horrible tenant” problem:
The “horrible tenant” stories take on a number of flavors, but most often boil down to tenants who either trashed the property and/or didn’t pay rent. More often than not, the owner managed the property themselves and failed because they didn’t treat it like a business. Thorough screening of the tenants was skipped. Due dates weren’t strictly enforced. No routine inspections of the property were done. Because of these failures, they only realized after they evicted the tenant that the property was trashed. As a result, months of rent were missed and a lot of money had to be spent to fix up the property for the next tenant.
THAT’S NOT A TENANT PROBLEM – THAT’S A MANAGMENT PROBLEM
The “lost a lot of money” scenario:
It could be because of the above issue. After not collecting rents for months once they got the tenant out, they didn’t have money to fix it up and lost the property. Or maybe the roof, AC, and other major expenses all happened in a short period of time. Without enough cash reserves they couldn’t afford to do everything and they had to sell it at a loss. In these cases, the owner didn’t do their homework before they jumped in. They ran incomplete (or no) analysis, didn’t factor the expenses correctly, didn’t have a plan for the property, and leveraged themselves to the max without having a reserve fund.
THAT’S NOT A PROPERTY PROBLEM – THAT’S A PLANNING PROBLEM
Someone losing money because of their own mistakes doesn’t mean that real estate is risky. Risk comes from not knowing what you are doing.
But they don’t have to know someone that failed!
There are high level, professionally successful people that will shrug off real estate as being too risky. Dig in and ask them questions. You’ll often find the vast majority of people that think real estate investing is high risk know ABSOLUTELY NOTHING about it. They have no direct, or even indirect experience, yet they’ll confidently tell you it’s too risky!!!
They’ve probably just heard someone else say it’s risky and never looked into it.
They think that mutual funds and their 401k is a far safer investment. Why? Because that’s what everyone does. It’s almost a mob mentality and they assume “Nearly everyone is doing it this way, so it must be the best way.” Heck, it may have even been their financial planner that told them real estate risky. Of course they would! Why would they tell you to go invest where they don’t make commissions and fees off of you!
Just a few years ago, these same people, and almost EVERY SINGLE PERSON they know, LOST NEARLY HALF of their wealth in a few short months because of the market crash. And they still don’t think their investment strategy of mutual funds is risky!! Yet, because they know one single person (or even just heard about someone) that lost money in real estate that means real risky.
People are clearly not as rational as they like to think…
…and people don’t like to think.
They don’t want to think. Dismissing real estate as risky lets people feel good about their investment strategy without having to spend time learning about and understanding it. It’s far easier to avoid that work by simply telling themselves it’s too risky
Their mutual fund and 401(k) providers can do all the thinking for them. A provider that is not legally obligated to act in your best interest. That’s right, these providers can put YOUR money in funds that make THEM the most, even if they don’t make YOU the most money. How crazy is that?! And they still make money even when you lose money because of their fees!
They’ll spend more time planning their fantasy football lineups this season than they will educating themselves about different investment types. They’ll spend more time planning their next vacation than they will planning for their financial future.
SO IS REAL ESTATE RISKY?
That’s too much of a blanket statement to answer outright. Everything in life has some level of risk. You took a risk when you got in car and drove to work. At your “safe” job working for a paycheck, you are at risk that the company falters and has massive layoffs.
The question is really: “Is real estate riskier than other investment strategies?”
As a whole I think real estate (when done right and with proper knowledge) is one of the safest investments available. With proper knowledge, not only do I think my real estate investments are very low risk, I also achieve FAR superior returns than I would in the stock market. Another added benefit for me is that it’s something that I have some actual control over as opposed to putting my money in a stock where I have no say what happens. Stock values and performance are at the mercy of decisions that I have no part in making.
I studied and analyzed MANY possible routes to achieve my financial freedom. I looked at all possibilities and made an educated decision to pursue real estate based on facts. Both family and friends tried to tell me that real estate was risky. But I didn’t take their word for it. I didn’t write it off out of fear or stories of what happened to someone’s friend. Not a single person that told me it was risky had any direct experience or knowledge.
Don’t write off a path out of ignorance, be it real estate or any other investment strategy. Dig in. Learn. Question everything. Question everyone. Research for yourself. Come to your own decisions. Your future self will thank you.