Real and Perceived Challenges with Real Estate Investment
In this article we cover two disadvantages of real estate investment and some of the more common misperceptions.
The single largest disadvantage of real estate is liquidity. Unlike traditional investments (stocks, bonds, CDs, etc.), it may take weeks or even months to liquidate a property. However, the lack of liquidity dampens the effects of traumatic market events, so this is not a completely negative aspect of real estate.
The cost to buy or sell most other financial instruments is relatively small. Selling a property costs between 5% and 8% of market value. However, if you are exchanging one type of real estate investment for another (1031 Exchange), there may be no tax consequence, which reduces the effective conversion cost.
Hard to Learn
Investment real estate is one of the simplest investments to learn. Simplistically, buy properties in a location with a positive population and economic outlook where collected rent exceed recurring costs. And, as long as you buy investment real estate in a good area, all but the worst purchase mistakes are likely to be corrected over time through appreciation, inflation and rent increases.
Requires Too Much Time
With any type of investment you can choose to sink infinite hours. However, if you take advantage of the right resources, your time commitment is greatly reduced. For example, you could spend weeks or months, full time, researching mutual funds or you can spend a few hours with your trusted financial advisor and learn far more. The same is true with real estate. Our clients typically spend one day with us initially to understand real estate investing concepts and process and then approximately 30 minutes a month reviewing property manager statements.
If you want to fail in real estate, manage your own properties. Property management requires a very special skill set, plus you must be managing hundreds of properties to achieve the scale to afford the staff, software systems and processes. Leave this task to the professionals. None of our clients manages their own properties. Management costs are typically 8% to 10% of collected rent.
Real estate is one of the lowest risk avenues to achieving financial independence. Why else would banks lend money at a fixed interest rate for 30 years with 20% down? See our case study (2 min read) on how rental rates fared during the 2008 market crash in Las Vegas for some historical data.
If your goal is to achieve financial freedom (for you and your descendants) real estate is by far the least expensive approach. See Why Real Estate (3 min read) for more information on why real estate is your least expensive and best option for achieving financial freedom.
This article covered some of the more common misperceptions and the one real drawback with owning investment real estate, which is liquidity.