I think we can all agree that being afraid of stuff sucks. Whatever your fear is, whether it’s heights or snakes or huge crowds, that cold feeling that takes over you, where your stomach drops and the hair on the back of your neck stands up – it’s no fun.
With real estate investing, there can definitely be some fear involved. You may not have the same physical reaction as what I just described, but fear is fear nonetheless. Many investors, and especially those who are just starting out, have to deal with fear on some level. It may present itself just as a reluctance to move forward on a deal, or it may be full-fledged terror if you find yourself in a financial bind that could have serious and lasting consequences.
One of the keys to success in real estate is learning how to manage fear and ultimately overcome it to become a sure-footed, confident investor. Here are some of the most common fears that I see investors facing, along with suggestions for coping with and mitigating some of that fear.
Loss of Savings
It’s nice having a nest egg, isn’t it? Just knowing that you have a pile of cash in the bank for emergencies and other things brings a certain amount of comfort. But what happens when you pour that savings into a investment property, and then, for whatever reason, you don’t see any return on it? You can’t quickly replenish your savings, and now you’re stuck with an underperforming property.
It’s a scary thought, and it’s a valid concern. There are lots of horror stories of investors losing their life savings and being left with nothing. However, the common thread I see in those stories is that those investors all committed one grave error: they didn’t do their research. If they had studied up on everything about real estate investment (buying in the right market, picking a good neighborhood/property, tenant screening, money management, exit strategies, and so on), they might have found themselves in a different position. The takeaway is this: educate yourself! Doing this one basic thing will greatly reduce your risk level.
Another bad situation to be in is to have a property with negative cashflow. This means that the amount of money you’re spending on the property each month (mortgage, repairs, etc.) is more than what you’re getting in income (rent payments). You’re literally making less than zero on the property, and it will quickly become a major issue. The best way to avoid this is to run the numbers before you buy a new rental property. Get the last year’s operating expenses and income from the current owner, check surrounding rental rates to ensure that your rate is comparable, and then crunch the numbers with your projected mortgage payment in mind. Be sure to factor in ALL expenses, like taxes, vacancy rate, and HOA fees, otherwise your math will be off. Before you buy any property, your calculations MUST show that you’ll net a positive cashflow off the investment each month.
Anyone remember what happened in 2008? I certainly do. That was the beginning of a terrible time for real estate investors, because it marked the beginning of a major economic downturn. After the housing bubble burst, thousands of investors lost everything as the value of their properties plummeted. Unable to sell, they were stuck with hugely depreciated properties that posed a major financial burden.
So yeah, this is absolutely a legitimate fear, and one that has kept me awake at night, too. I’ve learned to cope with it, though, because I know two things for sure: 1. The real estate market is cyclical, and it always bounces back, and 2. I’m extremely careful about the investments I choose. There’s always going to risk involved with any type of investment, and the fact is you have little control over the market. But what you do have control over is what you choose to put your money into. Again, this is where that research and self-education pays off, because the more you learn about real estate, the better your decisions will be and the less risk you’ll take on.
Being afraid isn’t a new feeling for investors. We’ve all been there, because this can be risky business. My advice is this: Acknowledge fear but don’t let it control you. Learn how to harness it and use it to propel you forward instead of hold you back. Talking with others in the business who have experience, like investors, realtors, and turnkey providers, can also be extremely helpful. They can provide insight and guidance, and may even be willing to give you a pep talk when you need it.