Top (5) Real Estate Investing Myths
Real estate investment has become a popular topic around the water cooler and dinner table these days. The more uncertainty we see in the stock markets the more people begin to look for a safe harbor to safeguard their hard-earned money.
My choice for investors seeking less volatility in their investments is real estate. Yet surprisingly, real estate investors across the country still represent less than five percent of home purchasers.
So, it begs the question: if the majority of people think investing in real estate is a good idea, why aren’t more people doing it?
The answer is fear.
An individual may intrinsically believe that buying real estate is good, but if the thought of moving forward intimidates them because they are not sure how or what to do, it results in no activity. It is easier for more people to do nothing than to venture into unchartered territory that is full of fear and false information.
The solution to overcoming fear is knowledge.
Equipped with the proper information, it becomes easy to debunk some of the myths and misconceptions of real estate investing and begins to provide you with more confidence to take action.
Here are (5) of the most common myths that hold people back from moving forward:
1. I need to make hundreds of thousands of dollars to be able to afford a rental property
This is one of the most common misconceptions. The fact of the matter is – you don’t!
You would be surprised to see how the underwriting process at a bank works to help you accomplish your investment goals. Although every lender has their own internal way of calculating the rental debt, they all generally follow a variation of the following formula:
Calculate 40% of your variable income, sometimes called the Debt Service Limit (DSL) which is the maximum amount of money that a lender wants to see you pay towards servicing your Personal Consumer Debt (PCD).
Next calculate your PCD, which includes but not limited to your personal residency mortgage, property taxes, any car loans, leases, monthly credit card bills and any other personal consumer debit.
If you are looking to buy a rental property with a break even of positive cashflow and your DSL is higher than your PCD, then you will be able to qualify for a mortgage on that rental property. As you add more properties to your portfolio, the lender can simply offset the rental income against the cost of the mortgage and consider your rental portfolio as a stand-alone entity that services itself.
What many fail to realize is that if you qualify for one, you would qualify for multiple properties without having to increase your personal income. The key is to work with a professional Broker or Lender who understands how to build a portfolio.
***I am not a lender and really encourage you to sit with one to get a deeper understanding of how they qualify individuals like yourself, however I simply want to share a deeper look at how one can qualify or multiple mortgages without having to necessarily increase their income.***
2. My banker told me that I shouldn’t buy any rental properties, or they cannot offer me a mortgage on a rental
This is a classic case where many people fail to understand that not every loan officer at every bank is an expert in real estate investment portfolios. You will recall I mentioned earlier that less than 5% of people purchase real estate for investment purposes. Well that same statistic holds true for bankers and brokers. Less than 5% of bankers and brokers understand how to work with a real estate investor.
Not every bank has the appetite for lending money on rental properties an some are much more investor friendly than others. Each bank has a different way of calculating the rental income and may use a different percentage of rent to help you qualify for a loan.
The challenge is that if your personal bank is not an investor friendly one, then you may make the mistake of assuming that would be the same everywhere else. By choosing the right lender, it could allow you to purchase multiple properties without the need for higher income.
3. I need a fortune saved up in order to buy real estate
This is another myth that actually has two sides to it.
On one hand many people are not aware of the down payment options available to them, and on the other hand, there are still those who think they can buy real estate with nothing down (cue late night tv shows).
Again, I encourage you to sit with a qualified real estate lender, but most will confirm that they will require 20% down from your own sources for residential rental properties.
However, what many fail to realize is that equity in your home or existing real estate is considered your own money and a percentage of that equity can be used for your down payment.
Here is a common formula:
(Market value of your home x 80%) – (existing mortgage or line of credit) = potential accessible equity
Value of Home = $400,000
Mortgage = $120,000
No line of credit presently
$400,000 x 80% = $320,000
$320,000 – $120,000 = $200,000
In the above example, the homeowner would have $200,000 to invest. If this were to represent a 20% down payment, then the maximum purchase price they would afford is $1 million. This could represent (4) townhomes at $250,000 each.
There are a great number of people who are sitting on $200,000 of accessible equity in their homes today and in a position to convert their equity into $1 million of real estate over and above their principal residence.
The only thing holding them back is fear or the lack of knowledge how to get started.
4. I can’t imagine having to deal with tenants and the late night phone calls
I own a fair share of real estate over the years and a good majority out of State. If done correctly you can easily reduce these type of situations to almost never by learning how to self-manage or simply pay a good property manager 7-10% of the rental income to take care of it.
Knowledge is power.
Invest in a good manager, manage your manager and you’ll never have to worry about midnight calls!
And finally, one of the biggest concerns (or excuses) why people are afraid to take action:
5. What if the market crashes and I lose everything?
Invest, don’t speculate.
Speculators look for short term opportunities to make quick money. They take risks and gamble hoping to get rich quick. Investors like myself, buy for long term and don’t gamble.
If you purchase a property today at fair market value in a town with a solid tenant base with low vacancies and you have a tenant who is essentially covering all your expenses and you are planning to hold that property for a long term; then the value of that property between the time you buy and the time you sell is quite frankly irrelevant.
In other words, if you buy right and invest for long term, you shouldn’t care what is going on with the market. The market can crash, but it should not affect your investment, you bought with sound methods and have someone else paying your mortgage down each month.
Once the mortgage is paid off, you have even more income (passive income!) coming to you.
Again, this was written to help clarify some common myths.
I encourage you to take the time and educate yourself. Look for good sources of information, from those who don’t have a hidden agenda.
Replace your fear with knowledge.
If you have any questions, please feel free to comment below.
All the best!