Real estate has long captivated investors with its potential for profit and value appreciation over the long term. Properties that generate rental income or can be flipped for renovation profits seem like attractive vehicles for building wealth. However, the reality of real estate investing involves numerous challenges that give many would-be investors pause. Between the high barriers to entry, ongoing management demands, and market volatility, is it truly feasible to make good money in this asset class?
In this article, we will explore both sides of that question. We’ll outline the hurdles involved in breaking into real estate deals, such as capital requirements, licensing needs, and developing key analytical skills, as well as the obstacles involved in maintaining these investments.
Having surveyed these barriers, we’ll then examine proven routes investors utilize to profit from real estate, namely house flipping, long-term rentals, commercial properties, and more.
Barriers to Entry in Real Estate
Getting started in real estate investing does require overcoming some substantial initial hurdles.
One challenge is assembling the necessary capital to make competitive property purchase offers or fund deals. Real estate transactions often require coming to the table with 20% or more of a property’s purchase price in cash. For sellers, a higher cash offer with more secure financing is far preferable to one with few down payment dollars backed by mortgage contingencies. Raising $50,000 or more as a new investor to acquire that first valuable asset can be difficult.
Another hurdle is obtaining a real estate license – which is mandatory for any brokerage or seller-representing activity in most states. Real estate licensing involves completing 60-90 hours of pre-license education in core subject areas like real property law, contracts, regulation, and agency. Newcomers must be ready to study extensively, utilizing diverse avenues to learn more about real estate. Applicants must then pass a state-specific exam before gaining permission to practice. While useful for career realtors or agents, the time and monetary investment in education can seem daunting to budding investors.
Developing practical skills related specifically to property evaluation and deal structuring is another challenge inherent to breaking into real estate. Newcomers must learn general principles like market analysis, financial modeling, property valuation techniques, construction/repair basics, land use laws, partnership structuring, and more. Understanding how to properly assess a property’s highest and best use or determine accurate rental rates and projected maintenance costs takes meaningful study. The learning process compounds the initial effort and learning curve faced by prospective investors.
Securing early mentorship from experienced professionals in acquisitions, development, or another subsector can help lighten this barrier. Working directly under an established investor exposes newcomers to real-world deal experience and problem-solving sooner. However, finding the right individuals to provide guidance and oversight also requires hunting within personal and professional networks.
For many, the barriers to entry surrounding capital requirements, licensing hurdles, and skills development represent high and difficult obstacles when first contemplating a career or side business in real estate.
See https://hbr.org/2022/10/should-you-become-a-real-estate-agent to learn pragmatic steps on how to become a real estate agent.
Ongoing Challenges of Being a Real Estate Investor
While breaking into the industry poses substantial barriers, existing as an active real estate investor also continuously presents enduring difficulties. Property management responsibilities like rent collection, maintenance coordination, tenant screening, and dispute resolution demand significant administrative work. Even a single-family rental may consume hours each month dealing with these tasks. Larger multi-unit properties exponentially increase management complexities.
Repair and renovation projects also introduce unpredictable time and monetary expenditures that are ongoing challenges. Property components like roofs, appliances, siding, and foundations wear out over the years, often requiring five-figure investments for replacement or restoration. Natural disasters or unexpected events can damage buildings, further straining capital reserves. Minor issues like plumbing leaks or electrical problems must also be addressed promptly to maintain safe, high-quality housing for tenants.
Likewise, economic realities introduce market-related uncertainties that investors must navigate adeptly. Changes in macroeconomic conditions, population migration trends, job losses, and new developments nearby can soften an area, lowering rents and vacancies. Property values may equally decline during industry downturns.Conversely, hypercompetitive conditions emerge as an area boom – driving acquisition costs higher. Successfully adapting strategies according to shifting conditions requires constant evaluation and agility over the long-term ownership period.
Additionally, human element difficulties will arise in managing tenant behavior and turnover. Screening applications thoroughly and enforcing lease policies helps, but unavoidable issues like noise complaints, unauthorized occupants, lease breaches, and property damages from irresponsible renters challenge steady cash flows. These relational hurdles test investor patience and conflict resolution abilities on an ongoing basis.
Potential Routes to Real Estate Profits
Several proven methods exist for investors seeking to profit from real estate over time. One approach is house flipping, which aims to purchase undervalued properties, complete renovations, and quickly resell for sizeable margins. While this strategy allows for generating income from short-term capital gains, it also introduces project management complexities and pricing volatility risks. Flipping single-family homes of $150,000-$250,000 value is a common range for novice flippers, but competition grows in most revitalizing markets.
Click here to learn how to make money from flipping houses.
Long-term rental income from multi-family apartment buildings or single-family homes represents a steadier strategy. Positive cash flow materializes monthly from rents covering the mortgage, taxes, insurance, and reasonable maintenance expenses. Portfolios of 5-20 units provide economies of scale for management duties while diversifying across property types, locations, and price points. Larger apartment complexes and storage facilities tend to generate greater revenue but require considerably higher purchase prices and operational oversight.
Investing in commercial real estate like retail shops, offices, medical buildings, or industrial warehouses introduces even larger deal sizes but the potential for higher rates of return. Long-term “net lease” properties where national tenants cover most expenses through their leases are favorites among passive investors. Strategic development builds quality housing and fills local industry needs while capturing rising land value gains over time. However, securing entitlements and managing weather-dependent construction introduce additional risk profiles worthy of extensive due diligence.
Wholesaling represents a lighter-touch approach where investors identify off-market properties, secure purchase agreements, and then assign contracts to end-buyers for a fee. Assigning fees typically range anywhere from $5,000 to $20,000 or more – with no rehab required. For more seasoned professionals, syndications pool multiple investors’ capital underneath an experienced general partner for larger multi-million-dollar properties.
Is Real Estate Right For You?
With the various challenges and opportunities examined, carefully considering personal factors helps determine suitability for real estate investing. Those seeking passive income may gravitate toward long-term rentals, net-leased deals, or closed-end funds requiring less hands-on work. Active investors wanting to develop properties or trade assets frequently will certainly face greater headaches managing projects.
Risk tolerance also bears consideration, as real estate consumes sizable capital for long periods. Fluctuations in rents, vacancies, or market values can temporarily affect cash flows. Newcomers unprepared for these variabilities may feel overwhelmed.
Weighing skills, risk profile, goals, and location preferences helps match objectives to appropriate real estate types – whether live-work house hacking, turnkey rentals, large industrial complexes, or bundled securitized products. From there, connecting with local brokers, multi-family syndicators, or seasoned mentors ensures the proper launch.
Suman(Kul Prasad) Pandit is an accomplished business professional and entrepreneur with a proven track record in corporate and start-up sectors in the UK and USA. With a focus on sustainable business practices and business education, Suman is highly regarded for his innovative problem-solving and commitment to excellence. His expertise and dedication make him a valuable asset for businesses seeking growth and success.