It is true that real estate investing is one of the most secure ways to make profit in the medium and long term. However, don’t be confused. Becoming a real estate investor comes with a lot of challenges – it is not an easy task. Below we are summarizing for you some of the most common real estate challenges and possible solutions to tackle them.
Real Estate Investing Challenge #1: Qualifying for a Bank Loan
Even though we are facing some of the lowest interest rates in history, many people are having a hard time qualifying for a loan from the bank. This holds especially true for the self-employed. It is also true for people who have just started their job, have poor credit history, and/or have a debt. The problem of qualifying for and getting credit is a massive one as you need to be able to purchase a rental property in order to be part of the real estate investing world.
Solution: To be honest, there is no miracle solution to this challenge. There is always the option of paying in cash, but that requires either being rich or saving up for a very long time. If you plan to buy an investment property, you should work to improve and protect your credit score in order to be able to take a loan. If you have a debt, make sure you pay it down. Other options include trading some other possessions (like another real estate property or a car), house wholesaling, and leasing with option of buying. Or you could borrow money from a private investor, a family member, or a friend. The downside is that in this case the private investor will decide on the interest rate, largely depending on the kind of relationship between the two of you.
Related: Buying Investment Properties With No Money
Real Estate Investing Challenge #2: Affording a Good Down Payment
The second common challenge to real estate investing is again a financial one. Usually a down payment of 20% will be enough to avoid paying for private mortgage insurance. However, you often need a down payment of 25-30% to obtain a better interest rate on your investment property loan.
Solution: If you know that sooner or later you want to join real estate investing, start saving money for a down payment as early as possible. Make it a goal to put aside a few dollars each month; you won’t realize how quickly money will accumulate. After all, you need enough for just a portion of your purchase, not the whole amount. Having said that, make sure you don’t leave yourself with zero money after buying your real estate property as there will be unexpected expenses related to it.
Real Estate Investing Challenge #3: Buying a Real Estate Property Is a Time-Consuming (and Possibly Frustrating) Process
Just like buying your own home, purchasing a rental property requires a lot of time and energy. You will need to do a lot of online research, decide on the location and kind of property you want and can afford, possibly hire a real estate agent, visit a lot of properties, etc. That’s when you will start realizing that real estate investing in not only a business but also a part-time job.
Solution: You don’t need to be an expert in real estate to start real estate investing, but you will need to do your homework. Consider carefully what the best investment property for you is. Generally, it is a good idea to start small and simple; you can change your property for a bigger and more sophisticated one after you make some extra money and gain valuable experience from your first property. Also, look for a local real estate agent who works predominantly or exclusively with investors. Don’t worry about the cost as real estate agents are paid for by the seller. Do a lot of networking. Connect with local real estate investors. Try to learn something new from each one of them without overwhelming them with your questions and requests.
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Related: 7 Steps to Buying a Rental Property
Real Estate Investing Challenge #4: Managing a Rental Property Is Hard Work
As we’ve mentioned before, real estate investing is a business as well as a part-time job. Once you’ve become a landlord, you will have to deal with your tenants and fix any problems that occur. Whether it is a broken pipe in the middle of the night or a problem with the laundry machine on the weekend, you will be responsible for fixing it in due time. This will inevitably cost you time and money.
Solution: The most straightforward solution to this real estate investing challenge is hiring a professional property manager. True, it will cost you some extra money, but a professional individual or company specialized in managing properties will save you a lot of stress and headaches. Moreover, the additional cost might not be too high as such professionals benefit from discounts from service providers, stores, and others. So, make sure you don’t spend all your money for purchasing your rental property; leave some extra cash for managing it.
Related: Professional Property Management: Pros and Cons
Real Estate Investing Challenge #5: Your Money is Tied Up
Real estate investing is not like other kinds of investments in the sense that your money is not as liquid. Once you’ve purchased a rental property, it will take time and efforts and possibly come at a loss if you decide to sell it soon because you need the money. However, if you manage to keep your investment property in the long run, it can bring you reasonable profit and secure you a source of extra income while working your full-time job or after retiring.
Solution: Having said that, you should keep in mind that it is not impossible to sell your rental property if there is really a need for this. After all, your property is your money, and if you see a better investment opportunity, let’s say, you can sell the property and pay off the remaining part of the mortgage. What we mean is that the fear that you might need money in the future should not prevent you from investing in real estate now. Nevertheless, it is always a good idea to have some extra cash and/or to have other investments (such as stocks or mutual funds).
Of course, this is not a complete list of everything that can pose obstacles on your way to becoming and being a real estate investor. However, it brings your attention to the 5 most common challenges and possible solutions for them.