The biggest truth about real estate investing is that it’s not passive income. There are many operational decisions landlords make to earn rental income such as finding a new tenant, marketing the property, and doing maintenance work for the tenants.
The exception to this truth is having a property manager. My parents own a rental property that’s completely managed by a property manager so they cash in their checks all the way in South Korea even though the property is in Texas.
That is true passive income. However, property managers aren’t cheap and they take 10 – 15% of the rent. From the beginning, 10 – 15% of your rental income is gone. There are many real estate influencers in TikTok and Instagram showing how they “went from 0 to 22 properties in 3 years”.
Showing just how “passive” real estate investing is. That’s nowhere near the truth. Real estate investing can be lucrative but it’s not all sunshine and rainbows that people in the real estate industry has a vested interest in having you believe.
The truth about real estate investing is that’s hard work from sourcing the deal, managing the banks, managing the tenant, and so much more. It’s one of the biggest reasons that kept me from becoming a real estate investor. It’s too much work.
Let’s delve further into the 9 truths about real estate investing.
Truth About Real Estate Investing: 9 Truths to Consider
Below are the 9 biggest truths about real estate investing. These are truths that real estate influencers won’t tell you.
1) It’s Not Passive Income
If you’re doing real estate investing yourself, you need to find the property, talk to local sellers, market the property, perform maintenance work, and find a new tenant if they decide not to renew. Real estate investing is nowhere near passive because of the amount of active work that’s involved.
And on top of which, some markets are not ripe for real estate investing. In my town of Austin, TX, it’s near impossible to buy a property that produces cash flow. Many investors buy in Austin because they want the appreciation of the property, which is almost gambling.
The truth about real estate investing is that it’s highly active. It’s one of the most active forms of investing there is because of how hands on you have to be. And no matter how much work the investor puts in, they can still lose money at the end of the day.
All investing involves risk but if it’s active work, the income shouldn’t come with risk. However, real estate income comes with risk.
2) Truth About Real Estate Investing: Losing Money is a Real Possibility
Real estate agents and investors will say “real estate always goes up!”. Which is the mantra that led to the 2007-2009 financial crisis. In general, real estate prices does go up because population growth is positive. However, that doesn’t mean that making money is guaranteed.
Or even a good idea on a risk adjusted basis. In cities like Detroit where population is declining, real estate prices follow. House flippers also got a rude awakening in the midst of the 2022 housing price decline. Losing money in stocks is easy because investors can just brush it off after selling.
Losing money in real estate is hard because investors then have to deal with selling the property, which isn’t easy. Investors lose money and time with real estate investing. The truth about real estate investing is that many investors declared bankruptcy and lost their shirts through the venture.
Even the greatest real estate investors lost money, through this Houston multifamily deal.
3) Part Time Real Estate Investors Fail More
Real estate deals don’t happen at the most convenient times for the investor. Real estate deals happen when the seller wants to sell the property. The truth about real estate investing for part time real estate investors is that they are more likely to lose money.
It’s difficult to compete against a full time real estate investor who has the alerts set up on their phone and has the ability to see the property during the day time. Many real estate investors do it part-time. They read a book that says it’s possible to earn side income with a full time day job.
Having a full time job is already stressful enough. It’s infinitely harder to add another job such as real estate investing on the weekends and build a personal life at the same time. Part time real estate investors do not have the capacity to devote to real estate investing as much as a full time investor.
Finding good contractors that investors can trust to take care of maintenance issues isn’t an easy task, either.
4) There are New Bosses
Many people invest in real estate because their 9-5 boss doesn’t treat them well. They want to work for themselves where they get to call the shots! That’s all great but real estate investing just shifts the boss from a 9-5 boss to a tenant.
The tenant is the boss and they have the lease to make the relationship a legally binding one. Tenants pass maintenance issues onto the landlord and if the landlord does not deliver on a timely basis in accordance with the lease, there will be issues and problems.
The truth about real estate investing is that it just changes who the boss is. But there’s still a boss. Unlike stock market investing, where there are no bosses. The investor is free and clear from anyone telling them what they have to do, as long as the stock investments pay the bills.
As a result, real estate investing takes a fair amount of active work to be successful at it.
5) Real Estate Doesn’t Always Go Up
The boom market of 2020 – 2022 spoiled real estate investors rotten. They read articles of buyers bidding $100k+ over asking while waiving inspection and think real estate is the next gold rush to get into! We can’t miss out because who doesn’t like money?!
The 2020 – 2022 was the most anomaly time in our history. Never before has the Federal Reserve printed so much money for consumers to spend to their heart’s desires. The real estate correction of 2023 and beyond will teach real estate investors that real estate prices don’t always go up.
2023 already saw realtors dropping out of the real estate market due to market slowdowns. The truth about real estate investing is that it’s not always peaches and cream. There are property owners who bought in Florida, drooling over the record price increases in Tampa, Miami, and the like.
With property insurers leaving the state while we see record weather changes in the state, it’s to be seen whether the price increases were sustainable.
6) Survivorship Bias
The truth about real estate investing is that only the winners in real estate investing talk about how great it is. The ones who lost boatloads of money do not talk about real estate investing. The truth about real estate investing is that failures exist.
It’s not an easy game to run comparable models and have the model be accurate.
It’s not easy to continue to manage the relationship with the banks and realtors and hope they do right by you throughout your investing journey. Dave Ramsey went bankrupt because of real estate investing. And he was already a millionaire when he was deep into the game!
Of course the winners of real estate investing who got in at the perfect time buying great properties at the perfect cities who made a lot of money are going to talk about how great it is. We never hear from the losers and therefore, it gives us a false idea that real estate investing is flawless.
That couldn’t be further from the truth.
7) Truth About Real Estate Investing: It Distracts You From Your Job
Whether we like it or not, the majority of our income comes from our 9-5 than anything else. Our investments supplement our income but it won’t surpass our 9-5 income in the near term. The time we spend on real estate investing takes time away from focus we give to our jobs.
The truth about real estate investing is that it could take attention away from the biggest source of our income. We could be making more money if we invested our time in doing a better job at our 9-5. Investing always involves risk but real estate investors overlook this fact.
Doing a great job at the 9-5 could lead to big income increases of 30%+ after 2 – 3 years. Investors underestimate the 9-5 income and over-estimate the real estate income. Many of us work stressful jobs that demand so much of our attention and time.
Not focusing on the number one income source could be a big mistake.
8) It’s Not Easy
I personally got enamored with real estate investing as well. For the first 2 years out of college, I read books on real estate investing and figured out the general principles and ideas. However, actually executing on these ideas was harder than I anticipated.
The hardest part about real estate is managing the multiple people you have to do business with. Banks, tenants, possibly property managers, the sellers, real estate agents, and more. It’s not that easy especially when you already have a 9-5 job you have to focus on.
As the real estate investor, you have to know the answers to all of the problems. Even when the problem comes up at the most inconvenient times. I had a very stressful 9-5 already so becoming a real estate investor was out of the question.
The truth about real estate investing is that it’s not a passive way to earn money. It’s more hands-on than real estate agents would have you believe.
9) You Will Make Many Expensive Mistakes
There are landlord horror stories of tenants flushing “flushable” wipes down the toilet which damaged the entire property floor. Insurance wouldn’t cover the damages. It’s a simple problem that could’ve been fixed with a lease contract.
However, as a first time real estate investor, these problems are not intuitive. Tenants will never care about the property more than the landlord cares about the property. The truth about real estate investing is that you can you lose money even if everything goes right.
As a beginner, it’s almost impossible to get everything right on the first try, as well. Too many real estate investors do not account for capital expenditures and occupancy costs in their projection models. That’s what causes many first time investors to lose money.
Not accounting for capital expenditures is very expensive because the lease is locked in for an entire year before lease rates can change.
Truth About Real Estate Investing: My Thoughts and Story
I was a bright eyed recent college graduate who couldn’t wait to get into real estate investing. It was my ticket out of the rat race! Who wouldn’t want their tenants to pay for their mortgage AND have leftover cash flow at the end of the year? While you acquire more properties and do the same thing again!
The more I dug into the amount of work that would be required, the more I understood the truth about real estate investing. It’s a lot of work. And the business partners you need to make the dream a reality all work under business hours. Which means I would have to take PTO or visit them during lunch hours.
Something I wasn’t willing to do. It’s now 8 years since I learned the ins and outs of real estate investing and I still do not want to get into it. I currently have a cash balance of $200k, which easily could buy me $1mil worth of real estate. However, I still refuse.
Unless I have so much money in the world that I don’t know what to do with, in that I would be forced to invest in real estate, I refuse to get into real estate investing. It’s too much work for my life right now. I can’t imagine juggling the project and have a family at the same time.
I personally prefer to grow my money through stocks. Stocks are the true passive income because all you’re doing is clicking buttons and watching your money grow. The truth about real estate investing is that it’s not passive in the slightest bit.
Unbiased opinions are what matters the most in building wealth.
Truth About Real Estate Investing is Important
The 2022 boom caused many investors to buy short term properties to rent out on AirBnB. Then the AirBnBoom became the AirBnBust. Too many get enticed by the “passive income” marketing that they don’t dig into the truth about real estate investing.
Real estate investing shouldn’t be taken lightly because it’s one of the biggest purchases people make in their entire lives. Not only that, real estate is not liquid. People cannot sell their properties on a whim whenever and wherever they want.
They’re stuck with the asset. Then when a new buyer knows that the seller is selling because they’re losing money hand over fist, here comes the low ball offers. It’s an asset class that I was interested in getting into but chose not to because of how much work it would be for me.
The idea of passive income is great and that’s where people should work towards. However, the campaign may be passive income but the reality could be active income. There are 270,000 homeowners who bought in 2022 who are underwater on their mortgage in under a year.
The truth about real estate investing is that it’s much more difficult and harder than anyone else thinks. It’s almost a full time job in and of itself. I’m personally too old to put in that much work for upward mobility anymore.
A balance of hard work and good pay is what I’m after, now.
Truth About Real Estate Investing: 9 Truths Shortlist
- It’s not passive income
- Truth about real estate investing: losing money is a real possibility
- Part time real estate investors fail more
- There are new bosses
- Real estate doesn’t always go up
- Survivorship bias
- Truth about real estate investing: it distracts you from your job
- It’s not easy
- You will make many expensive mistakes
