Why is real estate so scary to so many of us? How do we find ourselves in this relationship where we live in something and are simultaneously intimidated by it? We are not talking about horror-style tactics where a monster jumps out for a quick scream. We are talking about fear of the unknown. It’s the type of fear where you know just enough about something to know that you don’t know much at all. It feels alien, so it scares you.
In 2019, a great number of us are renters. We interact with real estate as passive participants. Our familiarity starts and stops with cutting rent checks each month and placing maintenance calls to a landlord. The average American keeps our distance from real estate as an investment, approaching it more as a consumer. The most common path from consumer to participant in real estate transactions is when we pursue the so-called American Dream of homeownership. It’s a hero’s story, a symbolic milestone. It tells the world that we are adults (whatever that means) and we have achieved some semblance of stability in our lives.
That said, I can tell you right here and now with zero shame: Years before Jennifer and I became real estate professionals, we bought our own home … and we had no idea what we were doing. Those home disclosures explaining the property condition could just as well have been written in a foreign language. The mortgage documents from the bank may as well have been written in Wingdings font. We signed the papers; we bought a house. We still live in that house today, but looking back at the purchasing process, it’s pretty alarming how little we knew about real estate. The most alarming part is how comfortable we were with how little we understood.
How can we overcome the irrational fears of investing in real estate, given that it’s something we already interact with in our daily lives? Let’s tackle the question together.
Face Your Fears
Let’s get the fears out in the open:
• Fear No. 1: Real estate is risky.
• Fear No 2: Real estate professionals are sleazy and unethical.
• Fear No. 3: Real estate is so permanent that it traps you.
Any of those ring a bell? It’s likely you’ve heard some or all of these before. Long before we could Google questions like “Is real estate risky?” some of us heard stories of Uncle Bob’s “really bad deal” or Aunt Sally’s shady real estate broker who “ran off with all the money.”
We’ve been talking about real estate fears, but this is really about decision-making. Investing decisions are best guided by diligence and data, not dinner conversations with Uncle Bob. The framework below is intended to help you make better decisions in your investing efforts.
Fear No. 1: Real estate is risky.
Start to tackle this fear by considering these questions (and prove a point at the expense of casual stock investors):
• When you last purchased a stock for a publicly traded company, how much diligence did you do?
• Did you review their financial performance?
• Did you research the track record of the executive team?
• Did you run an analysis of the company’s penetration in their target markets?
Be honest. You didn’t do all those things, right? Yet somehow, you still felt comfortable investing your hard-earned dollars into that company. Compare that with a real estate investment where not only can you address the equivalent questions about a real estate; you can run deep analysis on the property by vetting the operator, the market and the deal.
To drive this point home, I’ll share that my firm addressed more than 100 diligence questions before investing capital in our last transaction, including meeting the operator in person. Even if you wanted to run a similar exercise on a stock investment, can you say that shook hands with Zuckerberg before you bought a share of Facebook stock?
Fear No. 2: Real estate professionals are sleazy and unethical.
Unscrupulous people occupy all corners of all industries. A key difference between the real estate business and, let’s say, corporate jobs, is that there is a lower barrier to entry to becoming a real estate professional than methodically competing through the hyper-competitive, cutthroat and academically rigorous corporate world.
If anything, a key difference I see between these two examples is that unscrupulous people in the corporate world are simply better at hiding their deviousness. Have you ever considered the possibility that there are just as many questionable decision-makers in the corporate world as there are in real estate? Fortunately, there are ways to vet a real estate professional before you get involved.
Fear No. 3: Real estate is so permanent that it traps you.
The closing process for a home often takes at least 45 days. The common form of financing for these transactions is a 30-year fixed mortgage.
These realities seem to perpetuate a fallacy that when you invest in real estate, you are in it for the long haul. When I was a renter, I bought into that fear as well. It couldn’t be further from the truth.
Actual truths about real estate ownership timelines:
• Homeowners take out a 30-year fixed loan, but often sell within 5-10 years.
• Wholesalers own properties for a matter of weeks.
• House flippers hold properties for a matter of months.
• Limited partners (LPs) in commercial real estate syndications are often part-owners in a project for five years or less.
Parting Thoughts
Are there risky investments? Yes.
Are there shady real estate professionals? Absolutely.
Are there properties that will financially or legally trap you if you invest in them? Sure.
Swap out the industry from real estate to any other, and the answers remain the same, whether we’re talking Wall Street traders, niche law firms, government agencies, tech venture capital, etc. Real estate doesn’t deserve your fear. If anything, you should fear an imbalanced portfolio that relies exclusively on a 401(k) to fund your retirement. Retiring without passive income is what keeps me up at night.