I love real estate investing. Over the last 15+ years, it’s helped me to pay my bills, build wealth, and produce passive income. And for many reasons, I believe real estate is the best investment vehicle to retire early and more confidently.
But I’ve got a news flash for you … real estate investing is also hard!
Real estate investing requires an initial investment of personal effort and time. And while it can be passive eventually, buying and owning properties is more like a part-time or full-time job at first.
So, I’m sharing this article with you because there’s too much sugar-coated real estate information out there. If you’re a new investor, I’d rather you face the tough truth up front. And the truth is that real estate investing has its difficult challenges.
But like anything else worthwhile in life, these challenges can be overcome. And overcoming them can lead to enormous financial and life benefits.
Plus as I’ll share in the next section, I actually think these real estate challenges are a good thing.
Why Real Estate Challenges Are a Good Thing
I’m writing this article from Cuenca, Ecuador. In Ecuador, like much of Central and South America, houses usually have a locked gate and walls with electric wire around the perimeter. These walls serve as physical barriers to entry for any unwelcome intruders.
In real estate investing, we have barriers to entry too. But these barriers are a good thing. They keep out the competition who are just looking for easy wins.
For example, everyone rushes into real estate when the wall is a little lower and safer (i.e. when good deals are easy like in 2008-2010 or when interest rates are low). But when the wall inevitably gets high again, the crowds thin out. It’s just too hard.
But the secret I want you to take from this article is that overcoming real estate barriers gets easier over time.
Real estate investing and any other business venture are like tests of your willpower. Will you stick with it? Or will you give up when you face the first tough challenges?
Your own most difficult challenges may last months or even years. But if you can push through them and become a better investor as a result, you’ll actually get to the most fun, lucrative parts of the business. You’ve just got to stick with it.
But real estate doesn’t just have one wall or barrier to entry. It has many. And in the rest of the article, I’ll specifically share three of the most common real estate barriers that you’ll need to overcome.
Good Deals Don’t Fall Into Your Lap
I’ve found the most difficult part of real estate investing to be finding good deals. It’s hard because most properties available for sale are NOT a good investment. And in the higher-priced part of a real estate cycle, an abundance of buyers makes the competition much more fierce.
I was lucky to face this challenge early in my career. In 2003 after graduating from college, I asked my father (a full-time investor) if I could find investment properties for him. Where I’m from in the southern United States, this job is known as a bird dog.
For six full months, I searched for deals every single day with no success. I called real estate agents, drove neighborhoods, sent letters, and made offers. But nothing led to a closed deal.
But soon after my sixth month, I found my first deal. And in the next six months of the year, I found 11 more!
Why did it take so long? Because as a newbie right out of college, I had SO much to learn. I was new to market analysis, new to marketing, and new to negotiating. And like any other profession, I had to pay my educational dues!
But I learned an important lesson – acquiring investment real estate is like a sales funnel. This means you have to patiently look at many leads in order to find a handful of prospects that could turn into one deal.
For example, even after gaining more experience, I often looked at 100 leads to make 10 offers that became 1 deal. That’s 1% success at best! And when I was new, the ratio was much lower.
So, prepare to pay your own educational dues and be patient as you look for your first deals. And then prepare for another challenge – remodels.
Beautiful Remodels Aren’t As Easy as a TV Show
I enjoy watching HGTV and other remodeling shows. I don’t have cable TV myself, but when I visit my in-laws, it’s a favorite pastime with my father-in-law. In one hour I can watch the complete transformation of an outdated property into something beautiful!
But as you probably already know, real life isn’t like TV. Following every single detail that leads to a successful remodel project would be boring television!
I remember the first remodeling project my business partner and I bought when I was 24 years old. It was a 3 bedroom, 2 bath fixer-upper house that had recently been foreclosed.
We hired a painter who ended up having drug problems. One day we told him his paint job wasn’t good enough and needed to be fixed. He then proceeded to angrily knock holes in our walls with his ladder!
Our first carpet installers weren’t much better. The seams between pieces of carpet looked like mini grand canyons! Good carpet installers make these transitions virtually disappear.
So, on our first deal we paid money to multiple contractors for the same jobs. We made numerous other mistakes that cost time and money. And we spent many hours over many months out on the job site. We were lucky to still make about $10,000 on the deal because we had gotten good at finding deals (see the previous section).
Fortunately, getting good at remodels pays very well. Since our first house debacle (and many challenging remodels along the way), we’ve made hundreds of thousands of dollars on fixer-uppers. And these profits came as a result of overcoming and learning from those early remodeling mistakes.
Once you learn about remodeling, you’ll still face a few other challenges that scare away many investors – tenants, maintenance, and vacancy.
Tenants, Maintenance, and Vacancy … Oh My!
There is one complaint I get more than any other from would-be real estate investors. They don’t want to deal with tenants, middle-of-the-night maintenance, or other rental problems like vacancies.
When I tell them that my business partner and I own 90 rental units, you can see the look of horror and sympathy on their faces. They want to know how busy and anxious my life must be with that many tenant and house problems.
It’s true that landlording problems arise. And it’s not as easy or as passive as owning an index fund of the S&P 500 stocks. But like the other challenges, it gets much easier over time. And the unique benefits of rental properties FAR outweigh the negatives.
I recently wrote Landlording 101 (or How I Managed 90 Rentals Units From Another Country). The main point was that rental properties can become a flexible, relatively passive business. But it requires building a team, creating systems, and employing the right technology.
But you don’t have to get anywhere close to my size as a landlord. I have friends who self-manage (i.e. do most of the work themselves) with a few rentals. They live off of rental income while traveling and experiencing large amounts of free time.
So, what’s worse – learning to deal with a few rental property hassles or staying with a full-time job or schedule you don’t like? I’ve certainly made my choice. Learning to solve the relatively minor tenant, maintenance, and vacancy problems is both achievable and worthwhile.
Can You Avoid Real Estate Challenges By Just Becoming a Lender?
A common answer to the three real estate investing challenges above is to only invest in more passive real estate niches like private lending. Instead of owning the property, you could be the bank. You could make loans directly to borrowers or through online crowdfunding platforms like Peer Street (affiliate link where I earn a commission if you sign up).
As the lender, you won’t have to worry about finding properties, remodeling them, or managing tenants.
Or will you?
To be a good lender, you need to be a good judge of the borrower’s ability and willingness to pay you back. You also need to analyze the deal even better than the borrower. If you’re funding a remodel project, you need to know how the remodel process works step by step. And if you’re loaning money for a rental, you need to know if the rental has a good chance of success.
So, private lending is a lot like the old saying about good judgement:
“Good judgment depends mostly on experience and experience usually comes from poor judgment.”
In other words, you can’t avoid the hard parts of real estate by hiding behind the scenes as the lender. If you haven’t learned from past mistakes as an actual property owner, you’re likely to make them as a lender. And even more than property ownership, these lending mistakes can be very expensive.
For this reason, I don’t see private lending as a beginner real estate investing strategy. I recommend that you first practice finding, analyzing, remodeling, and managing your own properties. Overcoming these challenges will make you a much wiser and sharper lender in the end.
Is Real Estate Investing Too Hard For You?
Have I scared you off from becoming a real estate investor? Is it too hard or time-consuming to become a core part of your investing strategy?
There is no right or wrong answer. If you choose to invest in non-real estate assets or start a business unrelated to real estate, you can also build wealth and achieve financial independence. So, pursue those alternatives if you are excited about them.
And if you choose to continue investing in real estate, do it with open eyes. There will be challenges. It’s inevitable. Nothing worth having comes easy or without cost.
But also remember that those challenges or barriers to entry are a good thing. If you can learn and become a better investor yourself, you’ll find yourself with less competition and more financial benefits in the end.
Best of luck!
What’s the hardest part of real estate investing for you? Have the challenges been worth it? How have you overcome them or learned from them?
I’d love to hear from you in the comments section below.
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Laura says
Chad I agree whole heartedly that investing in Real Estate takes a lot of work. But, the payoff is certainly worth it in the end. Thanks for writing these great articles! You are one of my favorites at bigger pockets!
Chad Carson says
Thanks Laura! Payoff is absolutely worth the work. I agree. And thanks for following along!
Greg Sonnier says
Well timed article for me. Payoff can appear like an illusion early in the game. A lot of $ has gone out over the past few months for our first 5 rehab-to-rentals. Now with seasoning/experience opportunities like late payments from tenants and unforeseen repairs it’s easy to start the internal negative talk. Article is a reminder they’re just learning, growth lessons and improvement opportunities. Power through it, learn and have plan to buy more when the dust settles!
Chad Carson says
Well-said, Greg. I’ve had that negative talk during intense, difficult challenges as well. It’s easy to do.
My business partner and I decided in the very beginning to turn each mistake or challenge into a seminar. This means we talk about it, write it down, and learn from the situation as much as possible. In that way it’s always a valuable experience (although we’ve paid a lot more for some of those seminars than we would’ve liked!!)
Mighty Investor says
Thanks for the honest article, Chad. Like all good things. This takes effort and working your way up the learning curve. Much appreciated.
Tom
Chad Carson says
Happy to share it, Tom. Thanks for reading. I just wanted to offer a balance to the more rosy-pictured articles. I think most people realize all of this is true, but sometimes it’s good to have a reminder so that we can prepare for the tough stuff.
Mighty Investor says
Yep. Follow up thought. What about not trying to get AMAZING deals and just shooting for decent? 10 years from now, we’d be glad to have a big portfolio yielding cash even if the initial returns were say in the mid-to-high single digits rather than in the double digits. Is there something wrong with this logic???
Mighty Investor says
I mention because I am the kind of person who could miss out on the good while searching for the perfect…..
Chad Carson says
It’s a good question. I I saw an interview with Warren Buffett recently on CNBC and he was asked about whether stocks were overvalued. His answer was that it always depends on interest rates and the length of time frame. Right now with interest rates still so low, assets like stocks and real estate are going to do better than bonds over the long run. Of course, that could change. And with real estate it depends on your specific location.
But what that tells me is that we should keep buying through ups and downs. Kind of like dollar cost averaging. But in this up part of the market cycle, my personal focus is on quality properties. I learned with the 2007-2009 downturn that my non-quality properties gave us the most trouble. The properties that were most desirable to tenants and buyers were more resilient and then grew most as the economy picked back up.
So, it’s ok to have different financial criteria for different quality of real estate because the risk level is different. What’s that lower acceptable return? That’s still very personal. You still want a spread between real estate returns and less risky/more passive assets. But as long as you don’t have big risks and you’re buying a quality property with mid-to-low single digit returns on investments, seems decent to me. I’d also look for value-add opportunities where you could expand or invest more money in the property to increase returns.
Mighty Investor says
That all makes sense. Since I’m basically all stocks, even if I get the same return as stocks by moving over into real estate it’s helpful to me from a diversification point of view. Though a lot more work!
Jillian Johnsrud says
One of my favorite sayings is “There is always room at the top for those who go the extra mile, because so few will.” It’s encouraging and challenging! When we were buying properties, I had a frenimy who wanted to buy rentals buy would never pull the trigger. It’s a good thing it’s hard or everyone would do it. Now when I see something that’s hard I think, “Sweet, I’ve got a shot at the top!” I just have to work hard, endure a bit more pain and persist longer. That I can do. =)
Chad Carson says
Love that quote Jillian! Such a good philosophy to adapt with anything.
Route To Retire says
I love posts like this that don’t try to sugar coat things, Chad! You know from my last post that I’ve had some fun with my first house. It went smoother with our second property, but I do agree that the work involved in getting the deal and then maintaining everything is not as passive as a REIT would be by any means. I use a property management company, but you still gotta manage them!
Regardless, the rewards of real estate investing far outweigh passive investing. Between the tax benefits and leverage alone, I wish I had bought more properties when I was younger.
Awesome post!
— Jim
Chad Carson says
It seems to always come to a cost-benefit analysis, doesn’t it? Real estate done well is worth the up front effort and cost. And it compliments the other strategies a lot of us use, like passive index investing.
Tom J says
Chad,
Do you have any thoughts (or articles you have written) that explore the benefits and costs of the following?
–crowdfunded real estate
–turnkey
–doing it all yourself (but hiring a property manager
I’m deciding between these different approaches. Obviously returns vary, but any additional thoughts beyond that?
Chad Carson says
Thanks for stopping by, Tom!
I am experimenting with crowdfunding now and hope to write more soon. It has positives and concerns for me. I like that you can diversify into many loans. But I have some concerns about worst case scenarios with startup, unproven companies. The security does not make me feel as warm and fuzzy as a real, direct-lending first mortgage loan.
I have no personal experience with turnkey properties, but I don’t have any issues with the concept in general.
My concern with both turnkey and crowdfunding is that it seems “easy” yet real estate always requires due diligence. So, it’s easy to skip market due diligence, inspection due diligence, numbers analysis, etc because these vehicles are click-a-button easy. So, I am worried people will not stick to good fundamentals with both these vehicles. And it sort of goes to the point of the article – being hard is a barrier to entry. So, returns will likely be lower the easier it becomes to invest with crowdfunding or turnkey.
So, I prefer doing it yourself and setting up your own operation with a manager. Being involved in the acquisition will give you the best chance of success. But if you are someone super busy AND who has the discipline to do due diligence – the other avenues of turnkey and crowdfunding could still be worthwhile. And they make sense for diversification.
Good luck!
Juan says
Hello,
This article is the first one I ever read about real estate and hope to read many more.
Question about renovating/remodeling a house when first purchased. I’m not much of a handy man, I’d say not at all.
Do you think I should learn handyman skills or can I still get into this industry without knowing this?
Thanks!
Carson Zimmerman says
Hey Chad I loved the helpful information. I am a high school student and I think I would really like to make this my future. Do you have any advice on how to get a good start out of high school?
Chad Carson says
Hey Carson! thanks for reading and learning. I think it’s great you’re thinking about getting started as a high school student. I made a video about getting started as a college student that I think may be helpful for you, too. Let me know what you think: https://youtu.be/2FJxFjdNKQI