I think investing in real estate is great. Although I don’t think all doctors need to invest in real estate, I encourage you to at least learn about it to see if it is right for you. To help you learn, I always try to give a very realistic picture of what direct real estate investing is. In this spirit, I’m going to focus this post completely on the 5 biggest downsides of active real estate investing.
Because there are downsides. Nothing is all upside. Anything worthwhile is challenging, especially in the learning phase. The ultimate goal is to eventually learn from these challenges and make them easier as you become more experienced.
That’s why I’m also going to show you how to overcome them so you can use real estate to accelerate your path to financial well-being!
As a reminder, Selenid and I are not experts. But we have done this a lot an d have learned a lot (especially from our third property). So I promise that we will keep sharing as we keep learning!
1. It takes time
This in my mind is the biggest of the real estate investing downsides.
Real estate investing definitely takes time. I can fully attest to that. No way around it.
And this is for sure the biggest concern that I hear other physicians express to me when they talk about getting started with real estate investing.
If you want to invest in real estate actively, I recommend you and your partner be prepared to spend the following amount of time:
- 2-3 months to prepare to start by reading, taking courses etc.
- 4-6 hours a week during the initial and subsequent property searches to identify, analyze, and view potential properties to buy
- 4-6 hours a week after you buy and get the property up and running
- 2-3 hours a week after you get the property up and running for general management
These are of course very rough estimates and averages. But you can see that it will take your time.
How to overcome this:
Well, the flip side of this coin is that the gain you receive from real estate investing in cash-flowing properties far outpaces the hours you put in.
That’s why direct real estate investing is a form of
passive leveraged income! Your time-to-income ratio with REI is way less than 1. By comparison, your time-to-income ratio for your day job is exactly equal to 1.
De-coupling your time from your money is the most important step to achieving financial freedom. And real estate is one of the best ways to do that.
So, how do you overcome this? My first recommendation is to work on your mindset. These hours seem a lot less scary when you realize and remind yourself of what the gain is. Just like in your overall financial life, you should have a why for your real estate investing.
When things seem annoying or like they are taking too much time, remember your why and that will pull you through!
For more time saving tips, see the “It takes work” section below!
2. It takes money
Real estate investing also takes money. No way around this one.
You can buy a rental property using all cash or with a mortgage.
With all cash, you need to have an amount of cash equal to the purchase price of the property. With a mortgage, you will need 25% of the purchase price in cash for a down payment.
That’s not a small amount of money. Many even high income earners will say that they do not have that and see it as a barrier to begin real estate investing.
How to overcome this:
This is maybe the easiest one to overcome. Remember, when you build your wealth, you also want to build an abundance mindset around money.
If you need it, you can make it appear.
Selenid and I bought our first rental property before I had even made my first attending paycheck. I never would have thought this was possible. But we reframed our thinking and found a way to make it work. This is how.
More specifically, here are some actionable steps to come up with the money:
- Survey your assets such as investment accounts etc. If one is not working as hard for you as it should be, perhaps that should be tapped for a real estate investment
- Do you have a large amount of cash on hand? Like say more than the recommended 6-12 months of expenses needed for an emergency fund. Maybe you have been nervous to invest this money. Now may be the time to overcome those fears and invest in a manner that minimizes risk and does not require a crystal ball to be successful
- You could take out a personal loan to cover the down payment needed. This is fine to do so long as the numbers in your cash-on-cash analysis of the property still work including this loan
- Find a seller who is willing to consider seller financing. This is when the seller acts as the bank and you make a principal and interest payment on the property to him or her every month. A very viable option
- Save 25% of the amount needed for the down payment every month from your paycheck. This might require cutting back in some areas. In a few months, you’ll have enough for the property
How to Use Debt to Buy Real Estate (& Why You Should)
Then comes the beautiful part. Once you have a cash flowing property, just save that cash flow to buy another property. And so on, and so on.
That’s how we got property #2 and property #3 under our belt…
3. It takes work
Ah, yes. This one always comes up right after time and money. The work involved.
And yes, it does take work. And I’ve been over the time that this work takes on average in the sections above.
You also may be worried that you don’t know how to do the work required. Maybe you don’t consider yourself “handy” or know how to fix things.
How to overcome this:
There are so many ways to overcome this:
- Mindset shift. Selenid and I had not idea how to fix property issues. But we told ourselves that we are pretty smart. And we’ve figured other stuff out in our lives that was tough and we knew nothing about. Chances are that we could do it again. So again we did it. Can’t tell you how many things we have pulled up on Youtube, learned, and then did
- Build a team. We still don’t know how to do everything. So we find people who can. If something needs fixing’ and we don’t know how or don’t want to deal with it, we call someone who’s job it is to know. Electrical problem. Just call an electrician. They’ll go and fix it
- Automate your processes. As we gain experience, we automate each process so that the next time it comes up, it’s easier to deal with. Here’s how we did this.
- Get a property manager. If you really just want to do 0% of the work, hire a property manager. We didn’t hire one because we realized most of what they do is just call other people to fix stuff. We could do that. And we don’t charge 10% of the monthly rent for the service. But, many times, property management can be the answer. As long as the cash flow numbers still work out in property analysis with a property manager, feel free to go for it!
4. The leaky toilet
Give me an honest answer, how many times in your life has a leaky toilet in your home/apartment/yurt work you up in the middle of the night?
If the answer is more than 0-1, then you have an issue!
I know for me, this has never happened.
So why do people get so worried about it happening at their rental property?! I never got this. But the leaky toilet is like the mascot of people who say they don’t want to own a rental property.
And sure, the “leaky toilet” could be any annoying thing that happens in the property at an inopportune time. But still, in my opinion, this is way overblown.
How to overcome this:
Here are tips for dealing with this when it does arise:
- Call someone to fix the problem. When you buy a property, have a few “fixers” that you know. An electrician. A plumber. Etc. If you don’t have one ahead of time, just Google and find services that have emergency hours. Most electricians, plumbers, heating and cooling companies have these services. Call them and they will go fix the problem
- Have a property manager. For a fee, this becomes the property managers problem and not your problem.
5. Troublesome tenants
I get this. Bad tenants are really, really annoying. I’ve dealt with some and it is not fun.
They can cause and create issues. Rent can be late. Properties are not as well taken care of. You may worry about law suits.
These are real downsides and risks of real estate investing.
How to overcome this:
- Select your tenants yourself. Selenid and I like to screen and meet our prospective tenants ourselves. Nobody will care about our property and our money like us. So we take the time (yes, time) to show vacant units ourselves and screen tenants. Selenid especially is a really good judge of people and we have yet to select tenants who have been anything less than awesome
- Buy vacant properties. We learned this the hard way. It’s way easier to select great tenants than to change bad tenants that you inherit into good tenants. So we now preferentially look for vacant properties. Or we make it a pre requisite to us buying the property that the seller has to get rid of the tenants before we buy
- Cash for keys. If you really get stuck with bad tenants, offer them money to break their lease early and move out
- Form an LLC. I’m not going to get into the weeds, but your investment properties should be under an LLC. This limits your liability and protects you from lawsuits resulting from any rental property you own (not that these are at all common, but it will help you sleep better at night). Here is a guide to help in creating your real estate asset protection plan.
These are the 5 biggest downsides to real estate investing that I have personally encountered and hear a lot of prospective investors really worry about.
However, the fact that these real estate investing downsides exist in no way should deter you from becoming a real estate investor.
Heck, becoming a doctor has risks…malpractice lawsuits, burnout, moral injury, bad patient outcomes. But you still did it. And why? Because it is worth it and you protected yourself as much as possible from these risks.
I hope that I’ve shown you that it is possible to overcome and protect yourself from these real estate investing downsides.
Trust me, Selenid and I experienced all of these doubts and had all of these worries. But we didn’t let them stop us and now real estate is a big part of how we flipped out net worth from -$450K to +$400K in one year.
If you think you are ready to become a real estate investor, read my real estate investing guide for physicians, study my strategy for analyzing and finding massively cash-flowing rental properties, follow my step-by-step guide to buying your first property, and visualize the big picture!
What do you think? What do you see as the biggest downside to real estate investing? Should they deter potential investors or not? How many times has a leaky toilet woke you up? Let me know in the comments below!
2 thoughts on “5 Biggest Downsides of Real Estate Investing & How to Overcome Them”
All the management issues are gone with NNN commercial property investment. These have become so popular that rates of return are low. They function like long term bonds, but your returns are greatly amplified by depreciation and deductibility of interest expense. Being frugal, investing as much money as you can, over a long term a significant wealth can be created.
Great point about triple net investments. I think that higher return with residential accounts for these “downsides” but they are fairly easy to overcome with the right systems and mindset!