Real Estate Investing Disadvantages

by Dennis Perry on October 12, 2011

In the last post we discussed the advantages of real estate investing and gave at least one answer to the question “Is Real Estate a good investment?” In today’s article, I want to address at least a few of the disadvantages of investing in real estate.

Now, the strategy or strategies you use will determine your advantages and disadvantages.  Not all real estate is the same.  Are you a wholesaler?  Are you going to keep properties long-term or do you plan on shorter hold periods?  The answer to these questions will determine your advantages and disadvantages as they are different for each method.

I tend to buy properties and then re-sell them on Lease-Option contracts so I have a medium intended hold period.  The remainder of this article is based on the methods I employ.

Tenants

In my opinion and personal experience, the top 3 disadvantages to real estate investing are tenants, tenants, and tenants. In all seriousness, our tenants are wonderful people and, in general, do a good job of taking care of our properties. But, tenant relationships can and do go sour. And, when they do, they can be the source of great stress and great expense.

There are a couple of keys I have found to ease the pain of this equation. It all starts with proper screening of your applicants. I don’t care if your property has been sitting empty for several months and you are desperate. Take the time to thoroughly screen ALL applicants. Believe me, an empty house is a lot cheaper than a bad tenant.

Once you have thoroughly and properly screened your tenants, make sure you establish the rules of the game from the beginning. You have both signed a lease agreement, a binding contract. Honor it and enforce it!

Tenants will often try to see what the rules of engagement truly are. If you let them pay a week late because an “emergency” came up, you have now made it OK to pay you late.

If your rental/lease agreement says that they are to mail the payment to you at a certain address and you agree to meet them at the property one month to pick the check up, you will now be expected to do that going forward. If you don’t mind this then fine, go ahead. Just remember, once you let your tenant make the rules, you will be tested more and more.

My strong suggestion is that you do not let it start to begin with. If your rent is due or is to be received by the 1st then make that the law. If your contract stipulates that payments not received by the close of business on the 4th are considered late and you have not received the payment by then, on the 5th deliver your state’s required default notice on that day.

In the state of Ohio, the required default notice is called a 3-Day Notice. My agreements state that rent is due on or before the 1st and late if not received by 5 PM EST on the 4th. If I do not receive the payment by that time, my first order of business on the 5th is delivery of a 3-Day Notice of Default. If the default is not cured within 3 business days an eviction action is filed.

My agreements also indicate that the tenant is responsible for the legal costs of an eviction action including the filing of the action. As soon as an eviction action is filed, a charge goes on their accounts. This only has to happen once (maybe twice) before the tenant understands that you are serious about the terms of the contract.

By the same token, if you expect your tenants to act in accordance with the terms of the rental/lease agreement, then you need to do so as well. If a tenant notifies you of a problem, then do everything in your power to respond as quickly as possible and always within the time limit specified in the agreement.

Legal

Another disadvantage, at least in my opinion, is the growing negative legal environment within which we operate. In the US we live in an increasingly entitlement-oriented society. Several communities where I have investment properties have added new taxes and regulation/restrictions aimed squarely at landlords and owners of investment properties.

In general, there are a far greater number of groups advocating for tenants than there is for landlords/property owners. Is it imperative that you keep your finger on the pulse of both local national laws that affect your investments. Whether you like politics or not, it is a key part of being an investment property owner.

I suggest you find and join your local Real Estate Investor’s Association (REIA). These groups provide excellent education, networking, and opportunities for community action all for a very nominal annual charge.

Liquidity

Real estate is a fairly illiquid investment. If you need money quickly you can sell a portfolio of stocks in minutes. If you need to sell your properties, that can take weeks or months and, in this environment, at most likely a lower price than you paid.

Other Costs

There are ongoing costs to owning investment properties as well. Ongoing maintenance, taxes, insurance, costs of vacancies, etc. can really eat into your bottom line. Be sure, especially in the first year or two of investing, that you bank some or all of your profits/cash flow for large-ticket maintenance items such as roofs, furnaces, and air-conditioners.

Time

Finally, I believe one of the biggest disadvantages of this type of investment vehicle is the time involved in managing it. As I stated in the previous article, this is definitely NOT a passive investment. Even if you have a property management firm or person, you will still have to mange them.

If you are going to invest while maintaining your “day” job be sure to spend time building team to support you. I recommend, as a minimum, a good real estate attorney, an eviction attorney (not always the same as a real estate attorney) and a good handyman who can handle a lot of the problems that will come up in an efficient and timely manner.

If you don’t know any of these people, your local REIA group would be a good resource for contacting support people. You can also interview other investors in your area and see who they use. I have found that investors, as a whole, tend to be very open and supportive of other investors in the area.

To diminish the disadvantages and risks of investing in real estate take time at the beginning to create a plan for what you expect your investments to do for you. Then set up systems to handle all aspects of the investment.

Whether you plan to own 1 property or thousands, I strongly recommend that you set it up and treat it as a business. As stated in the previous article, these are the best of times and the worst of times. Remember, real estate is good for some people and bad for others.

Don’t jump headfirst into this asset class without taking ample time to confirm that it is a proper investment vehicle for you. If it is, get the education you need, pick a strategy that you will follow, educate yourself about the investment, create your plan, and then execute. There may never be a better time to get started.

Till next time. Make your day great and your life truly rich in every way!

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{ 15 comments }

Orange County Singles Events LDS Christian Halloween Dance Party Social October 16, 2011 at 1:42 am

Hi Wealth Doctor,

Thank you for addressing the topic of why Real Estate Investing has disadvantages so people don’t race into it without first well-educating themselves on the topic.

Happy Dating and Relationships,

April Braswell
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Alex Arshavskiy October 15, 2011 at 11:06 pm

It’s amazing how many people do not understand that real estate is not a liquid investment. Thanks for the great article!

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Annie Born October 15, 2011 at 4:26 pm

Thank you for a reality check into having an investment house.
I have always heard the stories of bad tenants – surely there are good stories too?
Looking forward to tomorrow!
Create a great day!
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Sonya Lenzo October 14, 2011 at 11:57 pm

I have owned rental property and been blessed with grat tennants….but I can easily imagine that it would be a nightmare if they had not been so pleasant!
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Andrew Miner October 14, 2011 at 3:34 am

Dennis,
Great piece on the downsides of Real Estate investing. I agree that Tenants can be a Huge problem if things aren’t handled correctly (heck, even if they are done right). I’ve witnessed some terrible Tenant problems with some of my friends rental properties. Very stressful.

Andrew
http://www.andrewminer.net/legexercisesforsnow/

John Moulder October 14, 2011 at 3:00 am

Very informative article about the downside of tenants in your property . Why do people assume someone else owes them a living , and they don’t have to after another person’s property ? Selfishness is the new cancer sweeping the world .

http://johncmoulder.com/them-things.html

Jennifer Battaglino October 13, 2011 at 10:35 pm

Informative and scary… well at least the tenants scared me. I still remember my parents renting our summer home during the winter…only happened once in 30 years as they completely trashed the place and then they couldn’t get evicted.
I think as long as people follow your sound advice, they’ve got a shot.

Jennifer Battaglino
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Michael Paulse October 13, 2011 at 2:00 pm

Having never owned investment property it was interesting to read of the downside. Tenant issues, like most people issues, seem to be best handled with a firm approach.

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Rob Malone October 13, 2011 at 5:18 am

Dennis – this is a great evaluation of the downside of real estate. Do down economies increase the likelihood of getting “bad” tennants?

You are totally correct about our legal environment – my company has been sued 7 times over the last 10 years and all them were wrongful. We were eventually removed form all the the law suits but there was an average cost of around $50,000.00 in legal fees to do this. It is crazy that you get wrongfully sued then you have pay 50K (or the insurance company does – but we all end up paying part of that cost through higher premiums). That is why I am a big proponent of “loser pays” because it vitually cost nothing to be named in a lawsuit and basically in a civil suit you are assumed guilty until you prove yourself innocent. If the otherside had to pay your legal fees if you are removed from a law suit it would stop a lot of these frivolous lawsuits.

Body language tactics October 13, 2011 at 3:31 am

Your explaination of the downsides of real estate investing are straightforward and easy to undersatnd.
Scott Sylvan Bell
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Michael D Walker October 12, 2011 at 10:20 pm

Excellent overview of the disadvantages of real estate investing. Most books try to make it out as a quick get rich scheme, which it obviously isn’t, as your post so clearly demonstrates.

Michael
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Cherie Miranda October 12, 2011 at 10:16 pm

All of this is true. The legal part hits home because I’d see it all the time in California. Landlords and employers=evil there. The people that give people jobs and homes…crazy.

Cherie Miranda
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Kevin Bettencourt October 12, 2011 at 7:01 pm

I work with a bunch of property management companies and the tenant issue is huge. When you lend something to someone never expect to get it back in the same condition. Especially if the rented and got a sense of entitlement.

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Body Language October 12, 2011 at 6:52 pm

How “fast” do tenants pop on the market these days? How long does it usually take to sell a property that has been rented out or is known as a rental house?

Mark Hogan

Neil Dhawan October 12, 2011 at 4:36 pm

Dennis ~

Thank you for posting a very helpful article. It is obviously not intended to “scare off” anyone, but rather open their eyes to things that may not be readily thought of. Of course I had to chuckle at your “tenants, tenants, tenants” line … if anyone has had to deal with lousy tenants, they know exactly what you mean!

Stay Amazing and Do Great Things, Neil
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