Though many of our readers have found success in their real estate investments with the help of hard money, there's a bigger number still that have yet to take the plunge and invest in their first property. If you're like us, you've read and watched every piece of content you can get your hands on trying to glean that piece of insight that will push you across the finish line. The problem is that the advice is all over the place. Sometimes it's so superficial that you can't see how anyone couldn't find it valuable. Other times, so complex that only experienced investors could possibly understand it. But in all of these articles, there always seems to be some things they just aren't telling you.
Based on our experience working with investors, and as investors ourselves, here are some of the hidden truths of real estate investing.
Time is your biggest asset
One of the reasons you're likely interested in real estate is the long-term wealth-building potential that the asset class possesses. It's certainly true that the ability to generate monthly cash flow and capitalize on your sweat equity through fix and flips are huge benefits of investing in real estate over alternatives such as the stock market, cryptocurrencies, or other businesses. It's also true that with the use of leverage (borrowing) you can expand the impact of the capital you do have at your disposal.
It's important to understand, though, that real estate-generated wealth takes time. The value of your investment will ebb and flow with the market and it's not guaranteed a positive ROI in any truncated window of time. The only way to ensure profitability is through long-term holdings and savvy property management. Additionally, real estate is inherently illiquid. If you ever want/need to sell, it may take months before you are able to complete the transaction. Patience is one of the key virtues to success in this industry, and understanding the time-based nature of success will be important as you undertake a project.
You will encounter costly repairs
When you are invested in real estate, the burden of the asset is squarely on your shoulders. Unlike with stocks, the management and underlying performance of the asset is your responsibility. On one hand, this allows you to reap the benefits of your efforts and strategies. On the other hand, it can leave you exposed if you haven't properly covered all of your bases. A fallen tree from a summer storm could set you back thousands and the need to replace a roof, air conditioner, or furnace is an inevitability. If you don't have the funds or insurance to pay for necessary repairs you could find yourself in a great deal of trouble. Consider creating a detailed risk analysis that outlines everything that might go wrong on a property and how much it would cost to fix it. From there, weigh the probability that the event will occur in the next year and use the product of those figures to come up with a loose budget for annual repairs.
It's not a matter of if, but when, you will need it.
Hidden costs are the norm
There are more costs associated with owning an investment property than just your mortgage and repairs. All along the process of ownership, you will encounter payments in the form of fees, taxes, closing costs, insurance, and more that may eat into your profitability and will grind your progress to a halt if not paid. This is part of doing business and investors have to overcome these fees to drive returns. Understand that you should have some cash reserves on hand to cover these expenses, or otherwise account for them in your financing strategy. Loans closed through The Hard Money Co. build in some of these fees allowing you to finance them throughout the term. This keeps your project moving forward with minimal delay.
Rental rates could fall
The price of rent changes over time-based on a wide range of environmental factors. The price that you're planning on today may not be consistent for the lifespan of your investment. Unfortunately, the cost of your financing may be fixed which could lead to shortfalls in your monthly cash flows. To avoid losses, use the most conservative rental estimates possible so that you can cover your payments in even the leanest months.
Your property may be vacant for longer than you anticipated
It's one thing to have to cover low rental rates in order to get by. It's another thing entirely to have a vacant property that is generating ZERO income as your payments continue to come due. Vacancies are a reality of real estate investment and there will be periods where you have to deal with no cash flow. Running a stress test with your initial financial strategy could be the difference between success and failure. Try to build in a few periods with no income for a few months and see if your model can tolerate the vacancies. If you find that you can withstand the storm and still find room for profit in your strategy, you will know that it is worth proceeding. If this stress test leads to failure, it may be time to reconsider your options.
The little things can make a big difference
Though vacancies are always a reality, there are some steps you can take to mitigate the impact. No matter if you are occupied or not, you should be proactively marketing your property and its benefits. Marketing in today's age is not something that you can simply turn on when you need it. Having established channels in place can allow you to quickly fill vacancies should they arise.
You should also work hard to maintain a strong relationship with your tenants. Aside from being good practice for keeping them under lease, it will also prove beneficial should they decide to leave. A good relationship will prevent you from being blindsided by their decision and may provide the opportunity to address concerns and compromise to keep them in place. There are no downsides to maintaining these relationships and establishing clear lines of communication.
Check-in on your network
Nobody succeeds in real estate all on their own. Even the most independent investors still rely on a range of partners, contractors, financiers, or mentors to get their projects across the finish line. Even having someone as seemingly superficial as a friend to talk to can help push an investment towards success. Ask yourself who you have in your corner? Where can you turn when you need help, or when things are looking uncertain?
This goes beyond asking for favors from friends and family. The contractors that you will need to work with are people too. They need to know that you are a serious investor who oversees well-managed projects and pays on time. Give them a reason to prioritize and value your work when the time comes.
Consider bringing people into the fold who can act as partners or advisors. This may not be viable in every investment, but it can be invaluable to have a partner who brings a unique skill set to the table and who can push back when it's time to make important decisions. Having someone with aligned goals can help you navigate difficult circumstances and improve the likelihood of success.
Your network is probably larger than you think, but you can't expect to call for help only at the moment you need it. Work on building relationships when things are going well. This will give you the relationship capital to lean on them when the time comes.
Now may not be the time
Real estate investing can be an excellent tool for wealth creation, but it's not right for everyone. And even if you are poised for success in the industry, now may not be the right time.
No matter when you start, acquiring your first property is going to require taking the proverbial leap. You will feel the uncertainty and apprehension which will only go away with experience and profitability. But while the feeling is universal, not everyone is in a position in life to tolerate the stress.
Are you in a place in your life where you are best suited for success? This is a question that only you can answer. You will have to weigh the risks and benefits against the circumstances of your life. Someone in their early 20s may have to put every penny into an investment and risk losing it all. Another person in their late 30s may have more capital on hand but has to weigh failure against their ability to support their family. Take stock of where you are in life and establish confidence in your ability to succeed in real estate investing.
No piece of writing on the internet could cover everything you need to know before you start investing in real estate, but we hope that these reference points will make you a more informed investor. If you have any other unaddressed questions after reading this piece, let us know and we'd be happy to help you take the next step in your investing path.