Why Don’t More People Invest in Real Estate?

by Stephen Twomey | Feb 27, 2024 | Accredited Investor, BAM Blog, Blog, Real Estate Investing | 2 comments

Investing In Real Estate Is Easy When You Have The Right Team

Real estate has long been considered one of the most lucrative and stable investment options out there. There are several reasons why investors should consider adding real estate to their portfolio. From cash flow to diversification to tax benefits, real estate investing gives you a tangible asset that comes with plenty of advantages.

Real estate investing is a good source of passive income thanks to its ability to generate cash flow. This is the net income from a real estate investment after mortgage payments and operating expenses have been made. As you build up your equity and pay down your mortgage, cash flow tends to strengthen. [1]

This investment strategy also offers portfolio diversification due to its low—and sometimes negative—correlation with major asset classes like stocks and bonds. Having a real estate investment can lower portfolio volatility, therefore giving you a higher return per unit of risk. [1]

Real estate is also a tangible asset that typically appreciates over time, especially in growing markets or desirable locations. This potential for long-term capital appreciation makes real estate an attractive investment for those seeking to build wealth steadily over time.

The combination of potential appreciation, rental income, and diversification makes real estate investing a lucrative venture. However, there are still certain things you need to understand about this investment strategy before you dive right in. Here are some key things everyone should know about real estate investing.

Capital Requirements

The biggest reason people are not jumping at this opportunity to build wealth is the substantial capital requirements. Unlike other investment vehicles like stocks or mutual funds, real estate typically demands a considerable initial investment.

Unfortunately for many investors, the tried and true method of investing in real estate—becoming a landlord—is also the most expensive and time-consuming. [2]

Investors will have to provide large sums of money for down payments, closing costs, property maintenance, potential renovations or repairs, and other costs before they can purchase a property. Those with limited savings may find these upfront costs prohibitive.

Additionally, real estate investments often require ongoing financial commitments for things like mortgage payments, property taxes, insurance, and maintenance expenses. Some investors may find it challenging to enter the market because of this.

The amount of money investors need to purchase a rental property will depend on many different factors including the type and size of the building, its location, how much work it needs, etc. [2]

Lack of Access to Financing

On a related note, another reason why more people don’t invest in real estate is the lack of access to financing.

Since real estate typically requires substantial capital upfront, it is essential to secure financing. But this may not always be possible due to stringent lending requirements. Investors may struggle to secure financing for a real estate investment property if they have limited credit history or insufficient income.

As a result, the barrier to entry remains high for many aspiring investors.

Lack of Knowledge

Some investors are intimidated by the idea of real estate investing because they lack the knowledge necessary to navigate its intricacies. There are a lot of things investors need to understand regarding the real estate market as well as the investment process.

Real estate investing involves understanding market trends, property valuation, financing options, legalities, and property management. On top of this, the real estate market can also be highly localized. This means investors must have specific knowledge of different regions or neighborhoods. Real estate investors know which neighborhoods are the most desirable and when to purchase properties based on market trends. [3]

Many potential investors may feel overwhelmed by the complexity of these aspects. They may not have the time or interest to put in the necessary due diligence.

Without adequate understanding and expertise, investors may hesitate to enter the real estate market, preferring more familiar investment options. Unlike the large capital requirement, which is an actual barrier to entry, this is a perceived barrier to real estate investing caused by a lack of knowledge.

Time Commitment

Speaking of time, real estate investing requires a significant time commitment. Unlike stocks or bonds which you only have to monitor from time to time, real estate investments are a lot more demanding of your attention. Owning and managing a property can be a time-consuming endeavor. This is especially true if you are running multiple properties. [4]

For many investors, this is enough of a deterrent because they have many other priorities in life. Most real estate investments require hands-on involvement. So even though they generate passive income through rental payments, investors cannot just sit back and watch their cash flow.

Real estate investment properties require property management, maintenance, and tenant interactions. You will have to play the landlord role if you don’t want to pay for a third party property management company.

This can be daunting for those with limited time or resources to dedicate to such responsibilities. Managing properties entails addressing maintenance issues promptly, ensuring tenants’ needs are met, handling paperwork, and staying updated with local regulations, all of which can consume significant time and effort.

As a result, some potential investors may opt for more passive investment opportunities that require less hands-on involvement and time commitment.

Risk Aversion

Some investors refrain from investing in real estate due to their risk aversion. This is rooted in the uncertainty and potential financial loss associated with property investments.

A “risk-averse” investor is someone who chooses the preservation of capital over the potential for a higher-than-average return. Risk equals price volatility in investing, and risk aversion is the tendency to avoid that risk. While a volatile investment can either make you rich or eat up your savings, a conservative investment can grow slowly and steadily over time. [5]

Keep in mind that no investment is completely free of risk. But risk-averse investors will go for more stable investments because of the lower risk associated with them.

Real estate is generally considered stable due to their consistent cash flow and potential for appreciation. Their low correlation with other investments means that it provides diversification. However, some investors may find real estate investing risky due to the significant capital commitment and the ongoing financial responsibilities.

There is also the fact that real estate investments are illiquid. It will take a long time to sell your property if you need your funds, unlike more liquid investments such as stocks or bonds that give you easy access to your money.

These risks may dissuade investors from pursuing investments in real estate.

Alternative Investment Options

While real estate investment can offer attractive returns, some investors may simply prefer other investment strategies because of liquidity, familiarity, or personal preferences.

Given the significant upfront capital, the huge time commitment, and the lack of investment knowledge in this industry, investors would rather go with various investment options instead. They may go for stocks, bonds, mutual funds, or alternative assets like cryptocurrencies or precious metals.

These alternatives offer varying levels of risk and return potential, allowing investors to diversify their portfolios based on their risk tolerance and financial goals.

Consider Multifamily Syndication

Real estate syndication is a good investment option for accredited investors who want to try out real estate investing. This arrangement solves some of the biggest issues people have with traditional real estate investing like property management and the high capital requirement.

A syndication deal involves multiple real estate investors pooling their financial resources together in order to acquire a single real estate property. Instead of buying an entire property by themselves, they can acquire it as a part of a syndication.

A syndication deal can be done with any type of real estate. But because multifamily real estate properties are associated with strong and predictable cash flow, multifamily syndication is the most popular version.

Multifamily properties such as apartment communities and condominiums are generally larger and more expensive. Therefore they are much more difficult to purchase for a lone investor. But through multifamily syndication, multiple investors can pool their funds together to collectively purchase these larger properties. This makes multifamily real estate investing more accessible for accredited investors. [6]

In this arrangement, one experienced sponsor or syndicator leads the investment. Their job is to put the deal together, create a business plan, look for investors who will participate, and then execute the business plan. The syndicator serves as the general partner (GP) and takes on most of the responsibilities in the syndication deal. [6]

Meanwhile, investors take on a much more passive role. As limited partners (LPs), they only have to provide most of the capital needed to acquire the property, as well as pay some of the fees needed to get the deal going. They have no further responsibilities or liabilities in the syndication deal. [6]

In exchange for their investment, investors receive 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. Accredited investors should still do their due diligence and analyze the syndication agreement or private placement memorandum (PPM) carefully before agreeing to join.

The syndicator handles everything from performing due diligence to overseeing the property’s day-to-day operations. This is what makes multifamily syndication a true passive investment in real estate. They get to enjoy the benefits of owning a real estate property without the headaches of being a landlord.

Multifamily syndication offers accredited investors the opportunity to access larger real estate assets, diversify their investment portfolios, and benefit from professional management expertise without the need for hands-on involvement in property management.

Remember that most of these syndication deals are exclusive to accredited investors. These are investors who fit the criteria set by the US Securities and Exchange Commission (SEC), allowing them to participate in unregistered securities.

If you are an accredited investor who wants to add real estate to your investment portfolio but without the usual challenges, consider looking into multifamily syndication.