Rising home prices and historically low lending rates can mean only one thing: the real estate investor is back in full swing. According to John Burns Real Estate Consulting, the number of single-family homes being rented out has jumped 35% since 2006 to 15.2 million, largely as a result of real estate investors taking advantage of what appear to be ideal buying conditions.
However, buying real estate and counting on it to fuel your retirement, or provide you substantial monthly income, may not be a wise move. We asked three of our Foolish contributors what they believe are the biggest real estate investing myths prospective real estate investors and homebuyers should be wary of. Here's what they had to say.
Arguably the most pervasive myth when it comes to investing in real estate is the belief that buying a home is a great investment. To be clear, buying multiple homes and relying on rental income from those homes can actually be a good investment. However, purchasing your primary home and relying on it to fuel your retirement is rarely ever a good idea.
I know what you're probably thinking: "But home prices always go up, so why is this a bad idea?" Most homeowners likely remember the doubling in home prices between 1997 and 2007, but this was an anomaly. Based on data from Robert Shiller's Irrational Exuberance, between 1890 and 1990 home prices did go up at a rate that outpaced inflation, but only by an average of 0.21% per year. Between 1950 and 1997 home prices rose by an even more depressing 0.08%.
In other words, while a house is likely to deliver nominal monetary gains over time, those gains will more or less match the rate of inflation, giving you no more buying power in 10, 20, or 30 years than you have today. Your house isn't an investment, it's a place to live in. Don't forget that.
It can be easy to convince yourself that you can get rich by buying and renting out properties. Simple math can certainly seem to suggest that: buy a home with a $1,200 mortgage payment, collect $1,600 in rent, and boom -- profits and growing equity in the property.
Not so fast, though -- there are about a zillion other things to consider. For starters, not all properties will appreciate in value while you own them, so you might end up selling the home for less than you paid for it. That has happened to many, many people. Meanwhile, while you own the home, you might be collecting rent payments, but you'll also be making property tax payments and paying for insurance, maintenance, and repairs. Many homeowners across America enjoy tax breaks on the homes they live in, but those discounts disappear when it comes to investment properties.
Being a landlord is also trickier than it can seem. You might have been a model tenant in your own renting days, but many renters don't, or can't, make payments on time. It can take a forceful personality to deal with troublesome tenants, and it's not always easy to evict them. Many states have strong laws protecting tenants. You'll also have to deal with calls at inopportune times to fix a leaky roof or replace a refrigerator that stopped working.
Even good tenants aren't perfect. They won't necessarily take as good care of your property as you would, and when they leave, you may face unexpected necessary repairs. Even without that, you'll likely need to freshen up the place with new paint, etc. It can take a while to find a new tenant, too. It can be costly if the property is empty for a few months between tenants.
Many people do make money as landlords, but it's not nearly as easy as it might appear.
There's a common misconception that the only way to invest in real estate is by directly owning properties. As a result, while many people are comfortable with the idea of buying residential properties like vacation homes or even duplexes or small apartment buildings, the prospect of venturing into the commercial real-estate realm seems out of reach due to the greater complexity involved in working with business tenants to meet their needs.
Yet real-estate investment trusts make the commercial real-estate world a lot easier to navigate. With various types of REITs, you can concentrate on commercial investment in areas like retail space, office buildings, industrial facilities, or even niche areas like hospitals and healthcare facilities or rental storage units. REITs have management teams that will handle all the ins and outs of property ownership, and while they will take a cut of the profits, the REIT structure typically also means that you'll have part-ownership of a wide array of different properties, giving you diversification that's hard to achieve with your own personal real-estate portfolio. For those who are intrigued by the opportunities that are available in the commercial real-estate industry, taking a look at real-estate investment trusts can be the easy way to get access without making it a second profession.