Investing in Real Estate: 5 Myths That Could Cost You Thousands

Real estate has been an investment considered not only stable but also quite lucrative, attracting professional as well as amateur investors. Its myriad forms include renting out properties and flipping them to make a profit. Real estate promises great long-term wealth and security as well as diversifies a portfolio, even so, with every investment, comes risks. What makes these risks even worse are myths that surround real estate investing-misconceptions that lead to costly mistakes. Let's debunk five common real estate myths that might cost you thousands.

Myth 1: "Real Estate Always Appreciates"

One of the most common myths floating around concerning real estate has always revolved around the idea that the value of properties is always on its upward swing. Sure enough, historically speaking, for many markets, real estate values have trended upward, but even so, there are just so many instances where property values stall or even drop.

Many other factors effect property values. Some of these include economic depressions, shifts in supply and demand, the local employment rate and natural disasters. For example, in 2008, when the economy was in financial crisis, home values crashed-in many locations, doing so to the point that home owners and investors who purchased homes found that their properties were worth a great deal less than what they paid for them. Moreover, certain markets are very speculative. Once thriving, a neighborhood can crash due to changed industry, infrastructure, or demographics.

While real estate, indeed does appreciate over time, it's absolutely crucial to invest wisely and focus on those properties that have strong fundamentals—locational considerations, demand, and long-term growth prospects—rather than assuming appreciation is a given.

Myth 2: "You Need a Lot of Money to Start"

Another false assumption is that a lot of start-up capital is required in order to begin investment in real estate. Many would-be investors have been deterred by this false assumption because real estate investments do not necessarily call for major cash upfront. It is true that most real estate investments cost millions of dollars in purchasing multimillion-dollar apartment buildings and luxury homes, but there are a lot of entry points for any investor to join the game.

For example, the majority of new investors would first buy a single-family home or even a duplex. Another strategy is called "house hacking," that is: buying a multi-unit property and using one unit for your purposes while renting out the rest, thereby leveraging those rental payments against your mortgage obligation. Other investment possibilities in real estate include the establishment of REITs, which enables one to invest in the portfolios of real estate but does not require you to buy property. REITs allow you to get started with many fewer dollars and yet capture upside in real estate.

Sites like Fundrise also allow real estate crowdfunding, enabling investors to pool their resources with others to fund bigger projects. Thus, one can invest in real estate for literally a few hundred dollars. These minimum investment hurdles are much lower than most people ever imagined.

Myth 3: "Flipping Houses is Easy Money"

Due to popular television shows, house flipping is perceived as an easy and fast way to generate quick money. Although successful flippers indeed make tremendous profits, things are much more complex in reality. The process involves a lot more than just buying a fixer-upper, doing some renovations, and selling it for a massive profit.

To flip houses effectively, one needs to know how well the market is doing and the trends of real estate about renovation costs and the ability to forecast the actual amount that would be gotten back after renovation. Underestimation of renovation costs or time taken to finish a project can result in eating into your profits or, worse still, loss.

There are also moments in the market where some change that might not have been foreseen occurs. Perhaps you buy a property to flip and find yourself caught up in the process in the renovation of the property or shifts in the housing market that make it impossible to sell at a price you had hoped for. There are also closing costs, holding costs, and taxes that lower your profit margins.

Flipping houses is very lucrative, but by no means is it a get-rich-quick program; rather, it requires good research, due diligence, and some actual understanding of costs and risks.

Myth 4: "You Can Be Hands-Off with Rental Properties"

Many wannabe real estate investors think they can buy a rental property, hire a property manager, and sit back as the rental income rolls in. Well, not so fast. Property management does fit better to handling every day routine activities, but owning a rental property still requires effort when things do not go according to plan.

Property managers also come with their costs, usually ranging between 8% to 12% of monthly rent. Even a property manager will still require you to make critical decisions, including what the rental rate should be, approve large repairs, or ensure the property is in good standing according to local housing regulations. Suddenly unplanned vacancies, delinquent tenants, or repair work may also siphon some of your profits and require your direct intervention.

Although renting property can be a wonderful lucrative business, it is certainly not a passive investment. Be prepared to devote your time, money, and energy to ensuring that your property is well maintained and hence well secured as an investment.

Myth 5: "I Must Invest Locally"

Many new investors believe they should only invest in properties close to where they live, believing it is easier to manage and monitor. Though this can be beneficial for beginners, that limits your opportunities. The best deals or highest potential returns may not be in your local market.

Invest in real estate in other states or even across countries because of how easy it is to invest out of state or even around the globe in today's connected world. Property managers, technology platforms, and real estate investment companies facilitate very remote management and maintenance of properties for you. By looking past your local market, you can find investments with higher returns, lower entry costs, and stronger growth potential.

It may also be an easier way to overcome the distant problems of property ownership by hiring a local trusted property manager. In the case of investment in another state or country, lots of research should be done on the market, legal requirements, and risks associated with that investment.

Real estate is a good investment tool, but again, it has its flaws. These are common myths that, once understood and avoided, help you make better decisions protecting your investment in real estate and increasing the return within the maximum limit.