By Jonathan Howard, CFP®

Homeownership in the U.S. is considered to be the foundation for building wealth. By extension, many people view real estate investing as the same thing as buying a home—diving in headfirst, ready to strike it rich quickly because home prices seem to do nothing but go up over time.

Real estate investing is still thought to be one of the safest investments around. However, as with any other investment, real estate investing carries risks all investors should keep in mind, especially those with less experience.

Real estate investing is an expensive, long-term commitment that must be planned and executed with great care. Here are five misconceptions about real estate investing for less experienced investors.

1. Real Estate Is Always a Quick Path to Wealth

Are you considering investing in real estate or simply new to the practice? If so, know that real estate investing takes planning, time, and patience. Jumping in quickly and expecting fast returns increases the likelihood of mistakes and losses.

One of the reasons real estate has the reputation as a cornerstone of generational wealth-building is that it is illiquid. Whereas a skittish investor who buys stock might sell all of her shares the first time she experiences a multi-day price drop, there is no quick path to exit an investment in brick-and-mortar real estate.

The illiquidity of real estate forces what is broadly considered to be the golden rule of investing: buy and hold. The longer one holds an investment, the theory goes, the greater likelihood of seeing your investment grow in value relative to the cost of purchase. While it takes experience and discipline to avoid hitting the “sell all shares” button on a stock trading platform, the expensive and laborious process of selling real estate puts a natural speed bump in the way of panic selling.

Real estate can be an excellent, tax-efficient path to long-term wealth. However, as with any investment, the greatest benefit often goes to the investor who stays the course for the longest time.

2. Real Estate Income Is Completely Hands-Off

Income from a real estate investment is considered by investors to be passive income. However, the tax code would beg to differ. The reason real estate investments can have the tax advantages they do—such as deductions for depreciation and Qualified Business Income, among others—is that it is an active investment. If you invest in a rental property, there will be ongoing expenses and effort required as the property owner.

The investor will need to pay to maintain the property as well as cover the cost of insurance, property taxes, and mortgage interest costs. If the investor grows weary of midnight phone calls about leaky toilets or squirrels in the attic, then she will need to vet and hire a property manager. Property managers generally charge a percentage of the rental income, so they will free up the investor’s time while depleting the net yield from the investment.

While your investment in real estate likely won’t require a 40-hour workweek, it is not as effortless as truly passive investment income: namely stock dividends, bond interest payments, or income distributions from a limited partnership.

3. All Real Estate Is a Good Investment

The notion that “all real estate is a good investment” is simply false. Investors don’t always receive positive returns from properties. Investors seeking to flip a property may overspend on upgrades and find themselves unable to sell at a price that covers their expenses. Income investors might find themselves holding a property in an area that sees a migration of residents due to a corporate relocation, and struggle to find a tenant willing to pay rent that covers the property carrying costs. And this excludes the risks specific to commercial real estate.

Regions that have a concentrated dependence on a single employer (Detroit auto manufacturers, for example), can have significant, long-lasting price contractions if that employer finds cheaper labor elsewhere. In those cases, both commercial and residential real estate investors may find themselves spending money every month to own an empty structure.

Investors need to understand that no investment comes without risk, and the real estate sector is as exposed to loss potential as technology, healthcare, consumer staples, and all the rest.

4. Flipping Is Easy and Always Profitable

Flipping real estate involves risks, fluctuates with the market, and can reveal unexpected expenses. Flipping property requires experience, real knowledge of how real estate markets work, and every investor’s friend: dumb luck.

In 2022, the average house flipper in the U.S. made $68,000, according to data from Attom. But that’s a gross profit and doesn’t tell you about net return the investors made, or the time spent in earning it. People who flip houses don’t hit home runs with every investment. Expecting huge gains in a short time with a few houses is more like gambling than investing. Success in nearly any field depends on experience, discipline, consistency, and the capacity to endure failure.

5. Real Estate Is Always a Safe Investment

As mentioned above, the inability to quickly transact real estate means people buy and hold their real estate investments; they don’t check prices every day the way they can check the price of a stock. This creates the illusion that real estate prices are stable, and safely increase every year. However, real estate can be susceptible to economic conditions, such as a rising interest-rate environment or a change in tax law.

In addition to these risks, real estate has a litany of expenses you won’t find in the world of stocks, bonds, and funds. When you calculate the rate of return or yield on your investment, you have to include:

Insurance premiums
Property taxes
Loan interest expenses
Maintenance costs
Fees and expenses related to buying and selling the property
Tax deductions for all of the above

Also be mindful of opportunity cost. Funds used to cover loan principal or maintenance costs earn no interest or appreciation. Whether your property value grows by 20% per year or 1% per year has nothing to do with your loan balance or the cost of fixing a toilet. The money that goes toward maintaining a real estate investment is money that isn’t being invested elsewhere. If a real estate investment averages a net return of 6% per year, while the S&P 500 averages 10% over the same period of time, the investor may want to reconsider the wisdom of holding that investment.

Get a Financial Advisor Before Diving Into Real Estate Investing

Real estate investing is complicated and carries its own risks. At SeaCure Advisors, we offer several strategies across a wide range of portfolios to assist in developing game plans for investors with a variety of goals.

If you’re considering real estate investing and would like some guidance, schedule an introductory call online, call us at 877-328-4037, or email info@seacureadvisors.com.

About Jonathan

Jonathan Howard is a financial planner at SeaCure Advisors, a financial services firm committed to developing custom-tailored financial plans to help clients meet their specific goals and needs.

Prioritizing education, diligence, and communication with a high emphasis on tax planning, his goal with everyone he works with is to help them use their resources as tools to enhance their prosperity and well-being.

Prior to entering the financial services industry as a licensed life & health insurance agent, Jonathan spent 17 years in Los Angeles, working as an editor and visual effects artist. Jonathan holds a bachelor’s degree from Middlebury College as well as the Series 7, 63, 65, and CERTIFIED FINANCIAL PLANNER™ designations. He has contributed to financial articles published in Forbes, USA Today, Fox Business, US News & World Report, Kiplinger, Yahoo! Finance, and more.

Jonathan lives in Lexington, KY, with his beautiful and patient wife, two vivacious daughters, and two spazzy dogs. When he’s not working, he enjoys playing guitar, spending time outdoors, and family time. To learn more about him, connect with him on LinkedIn.

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