Real Estate Investing Sucks

September 5, 2012

(Photo by Images_of_Money)

Ever since I was in high school, I’ve always read and dreamed about real estate investing as one of the best ways to build wealth and passive income.

If you read the history of the wealthiest people (pre-internet era) – almost all owned real estate.

The idea is to accumulate 4 green houses, trade it in for a red hotel – as Robert Kiyosaki likes to say, referencing the game of monopoly.

Well, I’m here to say that real estate investing sucks!

I accomplished my goal of buying a 2-unit rental property towards the end of 2008. I thought the market had already hit bottom. Well, as of today, that property dropped in value by another 50%. I was losing so much money that I no longer own it and don’t plan on owning real estate any time soon.

One of the things the real estate investing books don’t mention is the effect real estate investing has on our brain. Regardless of if I had tenants or not, the property occupied a large part of my brain power.

Lawn maintenance. Snow shovelling. Upkeep. Things breaking down (water heater broke, so did the furnace). I had two consecutive years of “once in a 100 year” floods. Destroyed everything in the basement two years in a row. Then there’s the cleanup, mold concerns, etc.

I outsourced all of the above but dealing with the maintenance crew also takes up mental energy. Do they show up on time? Are they charging too much? Did they do a good job?

I also lived in one of the units, so every time I came in and out of my apt – I had an irrational fear of running into my tenants and them demanding some type of repair. Of course that never happened but the thought was in my head everyday.

When the year ends, you have to consider raising rent to keep up with inflation. Its even harder for me to raise rent especially when I have to run into those people. Another irrational fear, I know.

Of course, the taxes went up each year even though the property values plummeted by 50%. I have no idea how that works! Government always want their cash regardless of how the economy is doing.

One year, taxes went up by $850/month! It was a lucky coincidence I was refinancing at the same time and the lower rate countered the tax hike.

My tenants were great – gave me zero troubles. One time they had a toilet problem, and I had it fixed within a few hours. I was constantly on alert not to be a slumlord. That was another unexpected stress on my mind. Am I a good landlord or am I not doing enough?

A lot of irrational fears and concerns take over your brain when you own something and are in charge of the shelter of strangers. Trust me. It must similar to what new dads feel like – always worried if their kid is safe and doing alright.

Why not hire a property management firm to handle all the troubles, you say. I tried. No one wanted to deal with a 2-unit property. And even if they did, their fees aren’t 5% like the books say – more like 8-10%, especially for small time players.

I also jumped into buying property that was cashflow negative. I know all the books talk about cashflow positive rentals but have you tried looking for some in the real world?

It’s not easy to find cash flow positive rental properties in the Chicago area that are 2 units or less. Unless its in a super ghetto area – but who wants that headache?

You usually have to deal with 4-unit properties or bigger to cash flow = need more cash/downpayment to buy.

Since I was living in one of the units, I didn’t mind not cash flowing.

Now here’s the toughest part of real estate investing

It is one of the most illiquid forms of investing! I know what you’re thinking – DUH!!

I know a lot of the books talk about price appreciation, refinancing at lower rates, using the extra cash to buy more properties and eventually owning an empire. It doesn’t quite work like that in the real world. Esp when the economy tanks and all properties go under water.

Even if you want to cash out (with a loss) – it’s not that easy to find a buyer. Selling a property is like a 6-24 month ordeal, if you’re lucky.

The same properties I looked at in 2008 are still on the market today in 2012.

If you ever want to move to a different city, state, or country – owning a property will always weigh you down. And if you’re in a hurry to sell, you’ll also be selling for a discount – so there goes a lot of the price appreciation you were hoping for.

Now a lot of my troubles could have been avoided had I not jumped into real estate investing in 2008 or waited patiently for a cash flow positive place. Even if it cashflowed, all the other stresses are not worth the small “passive” income it would’ve produced.

I wasn’t a complete newbie though. I had been reading all the real estate books out there for at least 8 years prior. I also became a realtor to get the inside scoop on real estate.

In the internet age, with so many ways to make boatloads of cash – real estate investing is completely pointless and dumb. Unless you’re already wealthy and buying large pieces for tax writeoffs and whatnot.

Start a website. Look into affiliate marketing. Create an eproduct. Sell things on ebay. Take pics of your cat, make pillows out of it and sell it on etsy. Whatever.

Create your own virtual real estate online.

The days of real estate investing are over. Please dont fall for the hype!

John September 6, 2012 at 9:34 pm

Glad I found your post!

Pretty much sums up how I’ve been feeling for the last 5 years…I fixed and flipped my share of properties that were profitable but had a few that cost me lots of money. I also bought a 4-plex rental that I sunk a bunch of money into that I’ll never see again.

It’s been a rough road and I kept wondering what I was doing wrong…I’ve finally come to my senses in that it’s a terrible industry. The problem is that it’ll take 30 years to payoff the mortgage before you see real cash flow, that’s great and all but I was hoping to enjoy some of that cash before checking into a retirement home.

You don’t see kids in their 20’s getting rich in real estate for a reason…Real estate might have been a road to wealth before the Internet came along, but now it’s going extinct like an old dinosaur.

Deepak Nair September 8, 2012 at 7:13 pm

John! Really well said. It’s funny how real life experience differs so much from what the gurus talk about in the real estate books! I agree with you completely, real estate is dead! Thanks for sharing man.

Todd November 20, 2012 at 7:02 pm

LOL!! I did the real estate investing thing in the late 90’s and lost my ass. It turned out that I was a terrible property manager. Who knew? Not me. I just followed Carlton’s program and everything was just supposed to magically work. It didn’t. It cost me a lot of money and my credit rating to learn some very important lessons. Doing better now, credit is totally restored. Heed my warning potential real estate investors. It is NOT as easy as people say that it is. If it goes bad, you can’t get out quickly or cheaply.

P.S. Love the blog, BTW