Search the internet and you'll find no shortage of well-intentioned financial advice, from paying off your credit cards to building a solid stock portfolio. Not surprisingly, there's a world of advice out there on real estate investing, too.
But some of that advice isn't exactly spot-on. Here are three pieces of real estate investing advice that could lead you seriously astray.
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1. Flip houses to get rich quickly
It's true that there's money to be made with house flipping -- if you know what you're doing, choose the right market, and buy a home at the right price. But house flipping is also a practice that could result in serious losses if you aren't careful. And so it's important to be strategic about it.
In fact, one way you might get into trouble with house flipping is assuming you're equipped to do more work than you actually are. When you buy homes in disarray, they can be harder to fix up than you initially anticipate. And having to bring in professionals means having to spend more in the course of your renovations, so it's important to budget for that accordingly.
It's also important not to overpay for a fixer-upper you want to flip quickly. As a general rule, your maximum budget for a house flip should be 70% of its anticipated post-renovated sale price. If you expect to sink $100,000 into a given property and sell it for $400,000, your maximum offer on that home should be $180,000.
2. Own an income property
The upside of owning an income property is twofold. First, you get to generate a steady revenue stream by collecting rent. Second, you can benefit from home price appreciation over time.
But while homes do tend to gain value over the years, that's not guaranteed to happen. Similarly, rental income isn't guaranteed. If you buy an income property in an oversaturated market, you may go through periods of vacancies.
Furthermore, when you own an income property, the money you sink into things like home repairs and maintenance year after year is money you'll lose out on the chance to invest elsewhere. And so while you might have success with income properties, if your primary goal is to secure a stream of steady income, you may want to consider REITs, or real estate investment trusts, instead, as they don't require you to own actual property.
3. If you can buy a home in cash, do it
When you sign a mortgage, you commit to paying more for a home in the form of interest. And you'll often hear that paying cash for a home makes sense when you can swing it. Not only will you save money on mortgage interest, but you may be more likely to get an offer accepted.
Now, that last part happens to be true. Sellers do tend to favor cash buyers because mortgage-based transactions can be subject to delays and complications.
But paying cash for a home is a risky prospect because you're tying up a lot of money in an asset that's fairly illiquid. If you plunk down $400,000 for a home rather than putting down 20% and keeping $320,000 in cash, you'll lose out on the chance to invest that money at a rate that exceeds what your mortgage loan charges you. And also, should the need for money arise, you could be stuck waiting months for your property to sell.
In some cases, it could pay to buy a home in cash -- such as if you have an opportunity to snag an underpriced home in a strong market. But don't rush to make a cash offer on a home simply because you have the money. And also, don't make the mistake of depleting your personal cash reserves in the course of buying a home.
There's lots of money to be made in real estate, but it's important to employ the right strategies when going that route. Following these pieces of advice could lead you down a dangerous path, so don't make the mistake of buying into them.
