You’ve probably read about—or even met—people who claim to have made fortunes large and small trafficking in real estate. “Flipping” houses can seemingly make tens of thousands of dollars appear overnight, all while working your own hours.
If it you think it sounds a little too good, you’re right to be suspicious. Below, some harsh realities about the real estate game that most aspiring investors, homeowners, or potential buyers should learn about sooner rather than later.
1. IT’S NOT ALWAYS A GOOD LONG-TERM INVESTMENT.
Property owners who aren’t looking to make real estate their livelihood can generally commit to homes for personal use because of their perceived long-term value. But maintenance costs—new roofs, plumbing, property taxes—and interest rates can all conspire to negate any appreciation in the home over time.
2. YOU NEED A BACKUP PLAN. (AND PROBABLY A BACKUP TO THE BACKUP.)
Buying an investment property to sell at a profit has a lot of pitfalls, but one of the most dangerous is not having a back-up plan when the market has turned a bad corner. If selling outright isn’t an option, learn about a lease-to-sell arrangement, renting, or selling below cost to another investor.
3. INSPECTIONS DON’T REVEAL EVERYTHING.
Having a property examined by a professional prior to closing is a wise decision, but not all problems present themselves in an obvious way. Inspectors generally don’t remove or cut into walls to inspect interior issues; water problems might not be apparent until the area gets a considerable amount of rain. Once you own the property, you’re on the hook for any expensive repairs that could have been brewing quietly for years.
4. STRIP MALL LOCATIONS NEED FACELIFTS.
If you’ve considered investing in commercial property, strip mall locations can be an attractive option: they’re modestly-sized and can attract a lot of foot traffic, making them appealing to business owners. But those locations typically need to be renovated top to bottom every five to 10 years. Unless you plan on turning it around in short order, realize that a very large bill—adding to the overall cost of the property—will come around before long.
5. SELLING? THE FIRST OFFER MIGHT BE THE BEST YOU GET.
When you first put your home on the market, you might expect to spend months fielding offers. But in some cases, the very first potential buyers will be the ones making you the most attractive offer. Early birds tend to be highly motivated and have already scoped out your neighborhood to determine a fair market value.
6. EVICTIONS CAN BE BRUTAL.
Say you’ve tried to circumvent a lot of hassles by buying a rental property. The tenants cover your mortgage and leave a profit, but one or more come forward and say they can’t make their lease payments on time. While laws vary by county and state, evicting them isn’t a straightforward process. Waiting for a court date can add months to their delinquency; showing up with law enforcement to have the (ex) tenant moved out means cleaning up, repairing damage, and removing any belongings left behind.
7. YOU CAN’T ALWAYS FIX IT YOURSELF.
Property owners might believe they can handle minor repairs themselves, but residences can have issues requiring major plumbing or electrical work. By law, some of these repairs need to be performed by licensed professionals, adding hundreds or thousands of dollars to the cost of maintenance.
8. FORECLOSURE SALES CAN BE A HUGE BURDEN.
Buying a home in foreclosure is often perceived as a significant savings opportunity—but these homes are rarely abandoned in immaculate condition. Foreclosed homes can be in violation of codes and might even come with a buyer-beware asterisk to the sale, meaning that buyers would have no recourse if they bought something with major structural damage.
9. AGENTS ARE DROWNING IN FEES.
If you’d prefer to represent buyers and sellers in real estate transactions to collect commissions, keep in mind that a portion of your salary will be eaten up by recurring costs. Accessing online listings carries premium charges; so does getting a license. Joining associations means paying dues.
10. IT COULD TAKE YEARS TO MOVE A PROPERTY.
For commercial buildings, sellers can often find that buyers have very particular size and layout needs. A property might be too big, too small, or with the wrong kind of parking available. That’s why investing in commercial listings require a lot of patience: it could be months to years before both parties find a perfect match in one another.
11. MOST INVESTORS DON’T MAKE IT PAST A YEAR.
So much can go wrong with real estate that investors who decide to make it a career usually don’t make it past the 12-month mark. Like any business, it requires long hours, patience, and an ability to roll with unexpected crises. If you’re still standing in your second year on the job, you might just make it.
Still think you can make it in the world of real estate? Sit back and let Adam Conover talk you out of it once and for all. For the truth about real estate and housing, plus other everyday things we take for granted, turn into an all-new episode of Adam Ruins Everything, Tuesday at 10/9C on truTV.