There is no doubt that investing in real estate can be complex, but there are many misconceptions about real estate investments. Whether you are a new or potential real estate investor, or you have been in the game for quite a while, you probably have heard or come across certain misconceptions about investing in the real estate market.
Some of these misconceptions have been on for so long and unfortunately, many people believe them without carrying out adequate research to get the right information about property and real estate investments.
This article would review some of the misconceptions about investing in real estate and provide some information on what you need to know.
Misconception No. 1: Investing in real estate is too expensive
Firstly, expensive is relative and while there are real estate investments that require significantly huge sums of cash, there are also affordable means through which investors can partake of the potential benefits of real estate investments for a fraction of the cost. Secondly, the costs involved in real estate investments depend largely on the investment strategy and platform you use.
Also, there may be sources of funding such as bank loans through which individuals can get cash to invest in real estate. A simple example is, as a real estate investor who wants to purchase property directly in the market, you can do so by obtaining a loan from financial institutions.
Misconception No. 2: Investing in real estate provides passive income
Well, this may be true to an extent, depending on the type of investment. The reality is real estate investments are never really passive as there needs to be some sort of continuous management and maintenance of investment properties. A real estate investment may be considered a source of passive income when the burden of managing the properties or any tenant relationship is passed across to a third party.
For example, when you invest in alternative real estate investments such as Delaware Statutory Trusts (DSTs) or Real Estate Investment Trusts (REITs), although you may be at the passive end of things, managers of these investment vehicles are very active in the backend to ensure quality property investments are made and maintained.
Misconception No. 3: Investing in real estate is too risky and can be a bad decision
A basic concept behind any form of investing, whether in conventional financial instruments such as stocks or bonds, or alternative assets, is the possibility of returns. However, investing to make returns is also accompanied with underlying risks. Some of these risks include market risks — losing asset value due to fluctuations in market prices, economic risks — such as the real value of returns being eroded due to inflation.
The real estate market is not excluded from these possible risks. Property assets are relatively illiquid, meaning they may be more difficult to sell off to another party as quickly as you may want.
Most real estate investments are considered alternative forms of investments, they are generally not regulated and therefore considered to be risky. However, as it is with other types of investments, you need to be well informed about the different options of investing in real estate. Make sure to engage subject matters and experts such as accountants and financial advisors before taking any calculated risks with real estate investments.
Misconception No. 4: When it comes to investing in real estate, the cheaper the better
With real estate investments, cheaper doesn't always mean better. While getting good deals is something to look forward to, cheaper properties may lead to even more expenses in the long run. One of the possible ways to make returns from real estate investments is through the sale of property at an appreciated value leading to capital gains. Cheaper properties in certain locations may not appreciate, especially at the pace that you would expect and prefer.
Likewise, when investing in real estate, a more expensive property does not automatically lead to higher gains and profit. A more affluent region may appreciate even slower than a suburban property location in the long run. Investing in real estate is not always black and white. Asides purchase price and location, a lot of other factors impact the overall performance of real estate investments.
Misconception No. 5: Real estate investments can only be held for long-term periods
Most real estate investments are illiquid, but you can also hold some real estate investments for short-term periods. One of the things you need to consider before you choose a specific real estate investment method is your investment objective. Some investors are in it for long term periods of up to ten years. Others may want to hold their investments for only about three to five years. Determining what your investment expectations and objectives are ahead of time would help you choose the best strategies.
Misconception No. 6: Investing in real estate always leads to easy profit
Are there possibilities of making returns in real estate investments? Yes. However, there is no guarantee. For real estate investments that perform relatively well, a lot of work goes into research, due diligence, property selection and management.
When real estate investments involve pooling resources to partake in institutional quality properties for fraction of the costs, the sponsors and managers of such investment vehicles engage a lot of expertise and professionalism to ensure that they employ top-notch management practises to make good property selections as well as tenant selections.
Investing in real estate can lead to potential profit but it requires a lot of work and effort. This is why investment partners charge investment fees, to support the ongoing background work that has been passed on to them. Also, an important aspect to note is that past performances of investment vehicles do not guarantee future performances.
Misconception No. 7: The only benefit of investing in real estate is to earn dividends or capital gains made on sale
Capital gains and dividends as well as rental income are ways in which you can make returns from investing in real estate. However, there are other benefits that you can access through certain real estate investments. For example, through investing in Delaware Statutory Trusts as replacement property, you can qualify for the 1031 exchange tax deferral benefits, provided all requirements are met.
As a real estate investor, when you invest in Qualified Opportunity Zone Funds, you may be eligible for a capital gain deferral, a capital gain reduction or even an entire capital gain elimination when eligible investments in a Qualified Opportunity Fund are held for at least 10 years.
There is also the benefit of diversifying your portfolio through investing in real estate. Generally, real estate investments are not directly impacted by the market swings in stock markets and bond markets. This may provide a good means for investment diversification to serve as a cushion for potential losses in other investment assets. However, it is important to note that while investment diversification may reduce the impact of potential losses in some assets, even the best diversification strategy does not guarantee a hundred percent protection against total investment losses.
How to approach misconceptions about investing in real estate
Perform your own research:
Carry out extensive research to ensure that you have the adequate information you need about the different types and kinds of real estate investments. When you are more informed, you are likely to make better investment decisions. Research can be in the form of using the internet to get reviews and ratings, you can also obtain information about investing in real estate from potential investment partners. Information about publicly listed real estate assets can also be very useful.
Investing in real estate requires huge capital and financial commitment, as such, it is recommended to make research an important part of the process. Plan properly and ensure you get objective insights.
Engage subject matter experts:
Investing in real estate can be complex. There are usually many aspects to the whole investing process. For example, real estate investments require that you sign off on contracts, a lawyer may need to be engaged to the review terms and conditions of any purchase or investment agreements. Also, there may be some tax implications involved in purchasing or selling a real estate property. In this case, an accountant would be in the best position to provide expert advice on how this would impact current and future tax situations. Tax experts can also help you analyze your investment transactions to identify areas for potential tax benefits and advantages.
Partner with good investment partners:
To a very large extent, the investment partners you engage would determine your experience in the entire process when investing in real estate. While the investment partners cannot guarantee the returns you would get from your investments, their expertise and professionalism can impact the investment process. Real estate investment partners with more experience and professional knowledge can provide better insight, carry out better due diligence and invest in higher quality real estate properties on your behalf.
Stax Capital is a trusted investment partner. We are an experienced team that engages professional due diligence and expertise in making sure your investment goals are achieved. Contact the team for any questions on investments through real estate vehicles such as Delaware Statutory Trusts, Qualified Opportunity Funds and Direct Participation Programs.
This article does not constitute any tax advice. Individuals are encouraged to seek professional advice from independent tax advisors regarding tax consequences of investments.