Why Don’t Average People Invest in Real Estate?
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Here is What Sophisticated Investors Know About Real Estate Investing That Average People Just Do Not Know.
Real estate has long been known as a reliable path to building wealth, and for good reason. With the right investment property and strategy, real estate can offer steady cash flow through rental income along with the potential to appreciate over time. This combination of rental income and property appreciation can result in significant long-term wealth accumulation. [1]
Unlike other forms of investment, such as stocks or bonds, real estate gives you a tangible asset, meaning it has material value and you can use it yourself.
There are also several ways to get into real estate investing as it allows for various strategies tailored to individual preferences and financial goals. Some investors may opt for residential properties, leveraging rental income from tenants to generate cash flow. Others may focus on commercial real estate, such as office buildings or retail spaces, often offering higher rental yields. [1]
Investors can even explore niche markets like vacation rentals or multifamily properties, diversifying their portfolios for added stability.
The versatility and potential for both short-term gains and long-term wealth make real estate an attractive option for investors seeking to build financial security.
Why Don’t Average People Invest in Real Estate?
With all its incredible benefits, one may wonder why more people do not go for real estate investing. Here we are going to discuss some of the factors that keep the average investor from investing in real estate. Let’s take a look at some of the most common reasons:
Perception of High Entry Costs
Real estate has a reputation for requiring hefty upfront investments. For the average person, scraping together enough capital to purchase property can feel like a huge obstacle. Down payments, closing costs, and ongoing maintenance expenses can quickly add up, making real estate seem out of reach.
Unlike other investment avenues like stocks or mutual funds, which can be entered with relatively small amounts of money, real estate typically demands a significant initial investment.
For many, the notion of saving up enough money for a down payment on a property feels daunting, especially considering other financial obligations such as student loans, rent, and daily expenses. Simply put, a lot of people believe that real estate investing is risky. [2]
Lack of Knowledge and Expertise
Aside from the high barrier to entry, real estate investing can also be a complicated endeavor that requires time and effort. You cannot invest in real estate without knowing what you are doing. Real estate already has its inherent risks. Diving headfirst without understanding your investment strategy makes it even riskier.
Understanding the intricacies of real estate investing takes time. From market analysis to property management, there’s a lot of knowledge to absorb. Real estate investors need to completely understand real estate transactions, including property valuation, financing options, legal considerations, and property management. [3]
Without a solid understanding of these factors, the risk of making costly mistakes can deter people from entering the world of real estate investment.
Many people feel overwhelmed by this challenge. The average investor may not even know where to begin. Without proper education and guidance, diving into such a significant financial commitment can feel intimidating.
As a result, many people opt for more familiar and seemingly less risky investment options, such as savings accounts or retirement funds, despite potentially lower returns in the long run. Thus, while real estate investment promises lucrative returns, the perception of high entry costs acts as a significant barrier for many average people looking to diversify their investment portfolios.
Fear of Risk
Real estate, just like any investment, comes with its fair share of risks. The thought of potential market downturns, tenant issues, or unexpected expenses can send shivers down the spine of even the boldest investor.
Real estate investment often involves substantial capital, and potentially losing a significant portion of that investment can be terrifying. The perceived risk can outweigh the potential rewards for someone without the necessary knowledge or experience. [3]
The housing market can also be volatile and unpredictable, with factors like economic downturns, interest rate fluctuations, and local market conditions impacting property values.
The financial commitment involved in real estate investment, including mortgage payments, property taxes, insurance, and maintenance expenses, can create a significant financial burden, especially for those with limited resources or unstable income streams.
For those with limited financial resources, the fear of losing everything can be paralyzing, leading them to opt for safer, more familiar investment options.
However, investors should keep in mind that there is no such thing as a “zero risk” investment. Being paralyzed by risk is not good for you either. It’s all a matter of choosing the kind of investment that works best for you, your goals, and your risk tolerance. [3]
Lack of Time and Resources
Real estate properties can be a good source of cash flow, making it a solid investment if you are looking for a passive income stream. However, managing real estate properties still requires a considerable investment of time and effort.
From screening tenants to handling maintenance requests, being a landlord is a hands-on responsibility. The average investor may not have the time or resources to devote to this endeavor, especially if they have demanding careers or family obligations.
Real estate investing often means taking on the responsibilities of a landlord, including property maintenance, tenant management, and dealing with unforeseen issues like repairs or vacancies. This hands-on approach can be intimidating for people who already have full-time jobs or other responsibilities that take up their time. It’s also very challenging if you have no prior experience with being a landlord.
In order to succeed in real estate, investors need to have a precise plan of action. Instinct alone is not enough to be profitable in property investment. This means taking everything into account, including property management and the time commitment it requires. Investors need to think this through before leaping into an investment. [3]
Emotional Attachment to Investments
Purchasing a home or property can feel deeply personal, making it challenging for some people to approach real estate purely as a financial venture.
Real estate investing involves tangible assets—homes, buildings, land—which is why investors may have an emotional connection to them. It may be difficult to detach emotionally, which can lead to hesitation or reluctance to rent out or sell properties, even if it might be financially advantageous to do so. [3]
Fear of losing a place with personal history or sentimental value can cloud judgment and hinder the willingness to leverage real estate for investment purposes.
Average investors may feel more comfortable with financial assets that are intangible and traded electronically, as they perceive them to be less emotionally taxing. Real estate transactions often involve significant financial commitments and long-term implications, which can magnify the emotional stakes, especially for those not accustomed to such large-scale investments.
As a real estate investor, you must be able to control your emotions so that they do not interfere with your choices. [3]
How to Get Started on Real Estate Investing
While these barriers may present some challenges for investors, they are by no means insurmountable. With the right mindset, education, and support, it is possible to overcome your hesitations and find a lucrative real estate investment opportunity.
Education is Key
Real estate investing requires a solid foundation of knowledge, and so education is the key to success if you want to add it to your investment portfolio.
Begin by familiarizing yourself with the various investment strategies, such as rental properties, fix-and-flip projects, or real estate investment trusts (REITs). Investors can look into various resources like books, online courses, and seminars to understand the fundamentals of real estate investing.
Learn all about things like property valuation, market analysis, financing options, and legal considerations. By investing in your education, you’ll be better equipped to make informed decisions and maximize your chances of success.
Start Small
Starting small is often the best approach for first-time real estate investors. Invest in a property within your means, whether it’s a single-family home or a small multifamily property. This allows you to gain hands-on experience while minimizing financial risk.
Some investors start even smaller by only renting out a single room and just dipping their toes in the real estate waters. Alternatively, you can try platforms like Airbnb so that you don’t have to take on a long-term tenant. [4]
As you gain confidence and expertise, you can gradually expand your portfolio and take on larger investments. Remember to conduct thorough due diligence before going for any kind of investment opportunity.
Seek Professional Guidance
Whether you’re a novice or a seasoned investor, navigating the real estate market can be difficult without some expert advice. Real estate professionals, such as agents, brokers, or investment advisors, can provide invaluable insights that will guide your decisions and help minimize risk.
Real estate professionals can help you develop a personalized investment strategy tailored to your financial goals and risk tolerance. Additionally, working with professionals can help you avoid costly mistakes and streamline the investment process, ultimately increasing your chances of success.
The Best Real Estate Investment for Accredited Investors: Multifamily Syndication
While the average investor might hesitate to invest in real estate, accredited investors are more concerned about what investment strategy to pursue because they have the net worth and income to access a much wider array of options.
Accredited investors have the financial safety net needed to protect themselves in case an investment does not work out. They also have the knowledge and experience necessary to properly assess investment opportunities. This is why the US Securities and Exchange Commission (SEC) allows them to invest in unregistered securities.
For accredited investors who wish to invest in real estate, one of the best options is multifamily syndication. Multifamily syndication solves the problem we mentioned earlier about how real estate investments typically require you to become a landlord. This makes it a true passive investment in real estate. Here is how it works.
A real estate syndication deal is arranged by a syndicator or sponsor who serves as the general partner (GP). They locate the investment property, conduct due diligence, and find investors who will provide most of the capital needed to acquire the property. The syndicator’s job is to put the deal together from start to finish. They will develop the business plan and also take charge of its execution. [5]
In a syndication deal, multiple investors serve as limited partners (LPs) and provide a share of the capital. With multiple investors pooling their resources together, it becomes much easier to participate in larger real estate deals that are normally too expensive for a lone investor.
Real estate syndication gives investors most of the benefits of owning real estate but with much fewer drawbacks. For starters, you will get to avoid all the headaches associated with being a landlord. This is because the syndicator will also be in charge of property management once the deal is in place. [5]
Real estate syndication deals can be done with almost any type of real estate. However, multifamily syndication is especially popular among investors due to its strong and consistent cash flow. Multifamily properties like apartment communities and condominiums have multiple units that can generate rental income. This means they are mostly unaffected by vacancies, unlike single-family properties that suffer greatly when their lone tenant moves out.
Multifamily syndication makes it possible to earn money from a larger real estate property without having to manage an entire building full of tenants. In exchange for their investment, LPs earn a share of the monthly cash flow, and depending on the deal structure, a share of the equity upon resale. However, every deal is different. [5]
Accredited investors should still conduct their due diligence before participating in a syndication deal. Carefully analyze the profit split and all the other details of the syndication before joining. These details should be available through the private placement memorandum (PPM) or syndication agreement. Learn about the structure of a syndication deal.
Thanks to its low correlation with other assets like stocks and bonds, real estate investing is generally considered one of the safer investment strategies out there. However, real estate syndication is an even safer option.
As an investor in a multifamily syndication, you can just sit back, relax, and enjoy your share of the cash flow.
Keep in mind that no investment is without risk. Syndication deals tend to last for several years, so investors should be comfortable with a bit of illiquidity. You will not have access to your funds for a significant period. This is why most syndication deals are exclusive to accredited investors.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
Another important consideration when investing in a multifamily syndication is the syndicator you work with. Since this is a passive investment, investors will have to rely on the syndicator to run the investment property and make all the important decisions.
To maximize your chances of success, it is highly recommended that you work with a trustworthy syndicator. BAM Capital is an Indianapolis-based syndicator that is widely considered a leader in its industry.
BAM Capital has a track record for excellence and an award-winning investment strategy that mitigates investor risk while creating forced appreciation. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [6]
This syndicator prioritizes properties that are Class A, A-, and B++, focusing on multifamily real estate properties that have in-place cash flow and proven upside potential. [6]
Being a vertically integrated company, BAM Capital can handle every step of the syndication process, from acquiring the properties to renovating and managing them. Accredited investors can rely on them for guidance at every step of the syndication process.
No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.
For accredited investors who want to enjoy passive income and all the other benefits of being in multifamily syndication, schedule a call with BAM Capital and invest today.
Sources:
[1]: https://www.investopedia.com/articles/mortgages-real-estate/11/key-reasons-invest-real-estate.asp
[2]: https://www.spirepoint.com/2-things-that-stop-you-from-investing-in-real-estate/
[4]: https://www.nerdwallet.com/article/investing/5-ways-to-invest-in-real-estate
[5]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndcation#important
