Real estate investing can be a great way to generate passive income. It is not, however, without its dangers. Below are five ways that real estate investing can turn on you.
Getting Pulled into Debt
Getting into too much debt can create financial problems. Unfortunately, real estate investment is an area in which piling up debt is often a reality. All it takes is having a property go vacant for a few months or a flip to cost too much money for you to go into debt. This is the kind of danger you can’t face without a strong financial plan.
As a real estate investor, you might be dealing with huge liability issues. If someone is hurt on one of your properties, you may be liable. If you don’t have the right kind of insurance coverage, you might be looking at losses of six figures or more. It’s always a good idea to remember your liability before making any kind of investment.
New real estate investors often have more tax issues than you may imagine. Remember, selling a property is actually subject to capital gains taxes, so you very well may be dealing with entirely new tax issues with your first property. Without the help of a good CPA, many new investors find themselves on the wrong side of the IRS.
Some real estate investments just don’t work out. While the financial consequences of failed investments are tough to deal with, it can be just as hard to deal with the emotional consequences of failing at a business venture. If you aren’t prepared for the possibility of failure, real estate investment may not be the best field for you.
Finally, it’s important to remember that you don’t have much control over the real estate market. You can do everything right with your properties and still take a loss because the market has turned. There will be times when it’s too hard for buyers to get a loan or there is too much inventory on the market, and your business will suffer no matter what you do. The market will often be your biggest adversary in real estate investment.
There’s little you can do to protect yourself from the dangers of real estate investing. You can, however, prepare yourself for the worst case scenarios. With proper preparation, you can reduce the impact of some of these issues.