Real estate is often billed as the path to the American dream. People are often told that they'll never create everlasting wealth without investing in a home or building a rental empire.
This can lead to people putting themselves in situations where they may overleverage themselves financially to fund a down payment, or they could end up disappointed when real estate takes more effort or yields slower returns than expected.
There are other ways to build wealth; for these 13 types of people, real estate is not the right investment to get them to their financial goals.
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Individuals with unstable financial situations
Real estate investment comes with a hefty price tag upfront, and real estate ownership comes with big price tags on repairs and maintenance.
Someone trying to stop living paycheck to paycheck should avoid investing in real estate. One broken HVAC system or roof repair, and that financial situation could become even worse.
People without capital
While there are ways around cash on hand when you’re looking for money for a down payment, including a HELOC loan or down payment assistance, investing in real estate without capital is not the best idea.
It can put individuals in a precarious financial situation if anything were to go wrong.
Those seeking quick and guaranteed returns
Real estate is a long game. Properties generally aren’t going to skyrocket in value overnight unless it’s an incredibly hot market. And, for long-term rental properties, the monthly return is often modest.
The real return comes over time as the property is paid down and then when the property sells. If someone is looking for a quick return, real estate probably isn’t the smartest move unless you’re an experienced house flipper.
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People who hate debt
It’s the rare investor that’s going to sink cash into every property they buy, and that means people should feel comfortable with some level of debt if they decide to invest in real estate.
They should also understand how to manage that debt responsibly and not take on more than they can pay back monthly — even when the market isn’t performing as they expected.
Those unwilling to commit time and effort to property management
Whether someone has a short-term or long-term property, time and effort need to be committed to property management.
If it’s a short-term rental, there is significant time spent managing bookings, communicating with guests, marketing the property, and dealing with issues, including guests who can’t figure out the locks or a clogged toilet.
Long-term rentals will require time spent finding new tenants and sorting out maintenance issues.
People who prefer diversification
If an investor sinks all their available funds into a down payment on one or multiple properties, there's less money to spread across the stock market, bonds, and other investment vehicles.
Those who want to diversify their portfolios should carefully consider how much real estate exposure they want.
People who prefer low-risk investments
Real estate isn’t necessarily a high-risk investment, especially when compared to the stock market. However, it’s still riskier than putting your money in bonds, CDs, money market accounts, or savings accounts.
The real estate market can be volatile and even seem like a roller coaster, watching it bounce up and down, responding to supply, demand, and interest rates.
And anyone who remembers 2008 knows that values can drop dramatically and take years to recover. It can still be a smart investment in the long run, but it may not be for everyone.
Those not willing to build a large network
To invest in real estate that requires property management, there needs to be a strong network backing up the investor.
From handymen to bookkeepers to cleaning crews, a network of trusted contractors can make or break an investor’s success. If an investor would rather go solo, then real estate might not be the right investment.
People looking for a passive investment
While a long-term rental could be a relatively low hassle day-to-day, it’s not a passive investment. Similarly, the home you live in isn’t seen as a passive investment since you’re taking care of maintenance regularly.
A short-term rental is not a passive investment unless you have a property manager — who may take 20% to 30% of profits.
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Those who aren’t eager to learn
Real estate isn’t an intuitive or easy way to invest. There are tax strategies to learn and implement, changing policies to navigate, and market trends to watch.
There's always something new to learn, particularly if someone wants to consistently optimize their investment and look for the next big opportunity.
People who aren’t up for a long-term commitment
Most real estate investments are typically held for years until the time is right to sell, or they’re held on to for decades while bringing in regular rent checks.
There are cases where there may be tax implications when properties aren’t sold at the right time, and even when they do sell, it can take time to line up financing and close.
People who don’t like complicated taxes or accountants
Real estate will make taxes more complicated regardless of whether a property is being bought and sold or if an investor is trying to optimize their tax strategy on a rental.
An accountant who specializes in real estate investment is the best expert to tap in these situations. If that’s not the path an investor wants to take, it’s best not to get involved in the first place.
People who hate dealing with banks
Real estate investors will spend a lot of time dealing with banks, filling out paperwork, and lining up their titles and mortgages. If this type of paperwork makes your head spin, then real estate may not be the right way to supplement your income.
For those who want a more passive approach to real estate investing and like investing small amounts in multiple properties, just like they could in the stock market, a real estate investment trust (REIT) can be a smart vehicle.
REITs let investors become partial owners of larger properties while receiving regular dividends. Think of it as a way to make extra money with real estate without dropping significant funds or dealing with property management.
FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.