Buying real estate as an investment is a dream many have. The idea of renting a piece of property to someone else while equity builds and debt reduces can be great. And it is, but these aspects of property ownership do not stand alone.
Owning a rental property has expenses, and they can be unpredictable. While simple wear and tear will happen, more expensive problems can occur like old wiring falling out of code and drainage pipes eroding. For the latter reasons, people who should not invest in property are:
- Bull market geniuses
- Risk averse investors
- Cash poor people
Bull Market Geniuses Should not Invest in Real Estate
A bull market genius is a person who makes money when everyone is making money, and finds it to be a testament of his or her investment savvy. In the late 1990’s the buying market was full of these people. In early 2001, many of them were getting washed away by the fiscal tsunami that came with favored stocks like Enron and WorldCom sinking like stones.
Shortly after that debacle, more of these investors were found to have been caught in the rush of rising homes values. The result of being so house rich and cash poor may have led them to refinance, pulling out a hundred-thousand dollars to invest elsewhere. After all, they made all that money on their home; they must know what they’re doing.
The Risk Averse Investors Should Avoid Real Estate
Risk is relative. While some invest in real estate because they are risk averse, others feel that property is too risky. This could be because they don’t know enough about what they are investing in (making them very smart to avoid what they don’t understand) or from a bad past experience.
Either way, if buying piece of property is going to shorten one’s life due to stress, it is best to avoid it. For those who need the security of knowing their money will be there tomorrow, even if it isn’t going to grow tremendously, there are low risk investments that will still bring a fair return.
Real Estate Requires Cash
The whole point of investing is to make money, not spend it. While this is true, it also takes money to make money, and someone who has no money cannot make money with money unless it is someone else’s.
Now, this is entirely possible with the purchase of a property via mortgage, and the building of equity by way of rent, but the remaining necessary cash is going to have to come from one’s own pockets at times.
For example, let’s say a property owner has a single family home with a renter. Suddenly, holes are forming in the yard. Upon further inspection, it is due to eroding drainage lines, and the problem cannot be ignored, but to the detriment of the property. Unfortunately, getting to the person in one’s local government who can solve this problem can be challenging for such an issue, and in the end, the problem may not be theirs to handle. Such a repair can cost more than $10,000.
Owning property can be a great endeavor. There are incredible tax benefits and the opportunity for great growth, but for any of the above people, it should be avoided.