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The Myths of Risky Real Estate Investing (June 13, 2021)


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Responding to questions from skeptics afraid of losing money in a deal, Andy Webb talks through common misconceptions about managing rental properties and how to effectively build wealth in this stable investment vehicle.  

The coronavirus pandemic has created a world of instability—not only for healthcare, education, and tourism sectors—but for investors as well. With uncertainty over what a post-pandemic world will look like, investing now carries new and heightened levels of risk which are making some investors gun-shy. Confidence in stocks, mutual funds, savings accounts, and even precious metals has dropped since the start of the pandemic. Yet Gallup polls show that investors are confident that real estate will remain the most reliable long-term investment in a post-pandemic world. Despite this optimism, investors must re-examine the risks that come with real estate investing through the new and unique lens of the pandemic.  

Have You Heard How Risky It Is To Invest In Real Estate? We’re about to tell you. 

Much of the West was caught off-guard by the pandemic and criticized for an overall lack of preparedness. Some global leaders claim that a pandemic of this magnitude was unforeseeable, but history says otherwise (e.g., 2009 swine-flu, 2012 MERS outbreak, 2014 bird-flu). Investors can learn a lesson from the missteps of global leaders: think about the unthinkable, foresee the unforeseeable, predict the unpredictable.    

Think About The Unthinkable, Foresee The Unforeseeable, Predict The Unpredictable  

Around the turn of the century, investors got used to an investment strategy known as “set-it-and-forget-it”, where real estate property could be purchased and almost guaranteed a return without much effort from the investor. Investors with this mentality learned a tough lesson in 2008 and will likely again suffer a loss if they do not carefully assess and adapt their investment strategies to the new risks created by the pandemic. Wise investors always have adaptive investment strategies that can serve them well under changing market conditions. For example, commercial real estate investors must analyze the immediate and long-term effects that lockdowns had on businesses as well as anticipate the potential for future lockdowns. Rental property investors must prepare for current and future income instability for residents and the likelihood of an increase in eviction costs (as well as shifting government regulations related to eviction). Investors should also keep in mind that in uncertain times, there may be a greater need for their own personal liquidity, which real estate investing usually cannot offer. 

Location, Location, Location Remains The Mantra 

So how risky is real estate investing? Sometimes it all comes down to location and one thing that the pandemic is unlikely to change is the age-old mantra that location is everything. Not only does location determine the price of the property, but it also determines financing costs, maintenance costs, taxes, rental income, resident pool, vacancy rates, and resale potential. All of these factors put together determine whether the investor finds themselves in negative or positive cash flow. So, one thing that hasn’t change is: research and choose your location wisely.   

Do Your Due Diligence Now, Save Later 

The importance of due diligence covers all aspects of the investment—from researching the market and location, to unearthing hidden long-term and structural costs, to applying a thorough resident screening process. Due diligence from the beginning will spare the investor from future money pits including evictions, major structural repairs unforeseen maintenance costs, and loss of rental income (whether actual or potential). Again, all of these factors together or individually can be the difference between negative or positive cash flow for the investor. 

Is Investment In Real Estate Too Risky? There Are Alternatives   

With coronavirus infection rates continuing to appear in waves and nations and markets responding accordingly, the world has entered its greatest time of global uncertainty since World War II. Naturally, with uncertainty comes risk. Investors can continue to profit in unstable markets by sticking to the age-old practices of research and due diligence BUT through the new lens of the pandemic. If the risk still seems too high for weary or first-time investors, know that there are many ways to invest in real estate without actually buying. Uneasy investors can pursue other options including real estate investment trusts (REITs), real estate stocks, partnerships, and even real estate crowdfunding. 

There’s no doubt that the investment world will look different post-corona. As long as investors are willing to assess and adapt to the unique risks born out of the pandemic, they can continue to thrive in the post-pandemic world.