A house model on a shopping cart, home investment

Real estate investing is one of the best ways to generate long-term and stable wealth that can secure a family’s fortunes; however, it is also precarious and sinks a family’s fortune if an unwitting investor is unprepared. Investing in real estate can be a big nightmare.

Nightmare No. 1: It is dictated by the market

Real estate is a localized market. It can be affected by national trends, such as lumber prices, but local factors largely impact it. For example:

  • Location of the property and trends in that area. School districts, crime rates, parks, transportation, property fees, and numerous factors impact real estate prices and dictate trends.
  • Government policies and local cultures, such as city councils that impose rent-control or hyperactive neighborhood groups that vehemently oppose development.
  • The age of the population.
  • The performance of the regional and local economy.

Under these conditions, an investor could purchase a “fixer-upper,” intending to sell it, only to get stuck with the property because the local conditions aren’t right.

Nightmare No. 2: Over-extension

Novice real estate investors should be concerned about costs, however, not to the extent that they sacrifice other money-making activities to handle tasks that professionals better manage. Real estate investors should ensure that they are maximizing the use of their time and money. For example, if an investor isn’t familiar with laying tile, he or she should hire a professional rather than waste an abundance of time learning the skill.

Nightmare No. 3: Troublesome Tenants

An investor may want to retain a recent real estate purchase as a rental property. However, rental properties have two major weaknesses. First, rental properties only generate income when they have tenants; therefore, the owner will likely have to support the property (maintenance, mortgage, taxes, etc.) while securing a tenant. Second, the pressure from covering these outgoing costs may cause the investor to enter into a lease with a troublesome tenant.

Tenants can refuse to pay. Tenants can also damage the property in retaliation for perceived issues with the owner. If a tenant refuses to pay, the only recourse is to seek an eviction, which could cost thousands of dollars and may take months.

Nightmare No. 4. Negative Cash-Flow

The investor must cover the cost outlays until a tenant or buyer is secured. Every dollar that goes out reduces the investor’s potential income.