8 Facts & Myths About Investing in Real Estate

The general perception is that investing in property is a good thing to do and a way to grow your wealth over a period of time, but there are also lots of myths about the process of buying and then owning rental property, which are often mingled in with the facts.

This means that there are plenty of us who are unsure what is fact and what is a myth when it comes to the subject of investing in rental properties.

Here is a look at some of the popular opinions and misconceptions that you may well encounter.

You need to already be rich to invest successfully in real estate

The plain facts of the matter are that of course it would be preferable if you already had plenty of cash in the bank and are able to buy a rental property outright without the need for finance, but you most definitely do not need to be rich to invest in real estate.

The National Association of Realtors compiled some figures on how people funded their investment property purchases and it seems that just under half of buyers paid cash and the remainder paid a deposit and used finance to fund the purchase.

This suggests that you certainly don’t have to be rich to aspire to build a property empire but there are of course risks attached to borrowing money on a house as you will need to make sure that there is sufficient rental income to cover the mortgage costs, or you will have to find the payments.

Too many rental properties can affect the neighborhood

Some investors worry whether they are buying in an area that becomes saturated by rental properties and whether it might have a detrimental effect on the neighborhood and property values.

Market forces tend to take care of this argument and there is presently more demand for rentals than homes to buy, especially in certain areas that are still recovering from the economic downturn where prices crashed, like Florida and Las Vegas.

The evidence of the past suggests that when homebuyers return to the neighborhood in numbers, this has the effect of pushing property values up, which then encourages investor landlords to sell at a profit.

So you shouldn’t be too concerned about the issue of too many rental properties.

Flipping is the best way to make money

For those not familiar with the concept of flipping, it is when you buy an investment property and quickly sell it on again at a higher price for a quick profit.

Flipping was definitely a widespread activity in the last property boom as it was relatively easy to buy a home, watch the market rise in value each month and then sell it on normally within 12 months or so for a higher price.

We are no longer in a bull housing market and it seems that only about 5% of homes bought by investors were resold within the year. The typical investor will normally hold on to a property for at least five years before considering selling, so you can reasonably assume that at present, flipping is not really the best way to make money on property, although it can be profitable if you buy a the right price, like a foreclosure for example.

I can depreciate my rental and property and claim a tax deduction

This is a myth that has come about because there is an element of fact in the statement as well.

The general position is that you are able to deduct the depreciation of your house each year on your tax return but you should also remember that the IRS will then want some of that back when you sell the house because it will then count as income, creating a tax bill which is often more than $10,000 when you sell.

You can deduct interest from your mortgage against your taxes

This is another myth than again has come about as result of there being some partial truth in the statement.

You are able to deduct a portion of your interest (interest x tax rate = deduction) but the math doesn’t add up when you look at it.

It would mean that you are basically losing $8,000 a year by paying the bank $10,000 per year in order to try and avoid paying the IRS $2,000.

If you are confused by that scenario, get your accountant or tax adviser to explain why this perceived tax advantage is a myth.

There is no need to pay any extra off your mortgage

There is a fairly widely-held view that it is better to put any spare cash you have to work in the stock market rather than pay a lump off your mortgage.

Investing in stocks does seem like a better investment strategy than paying off debt with any spare cash you have and you may well be able to make some decent returns if you make the right picks.

Simply relying on property market values to rise in order to cover the cost of your mortgage finance charges is in reality a false economy and a flawed strategy. If you pay a mortgage for thirty years, the money you have spent in mortgage payments over that time will almost be the equivalent of doubling the original sale price you paid, so it makes a lot of sense to clear your mortgage as soon as you can.

The rental income covers all the property costs

Some property owners make the assumption that as long as the rental income they have coming in pays the mortgage and a little bit over, that they they are effectively getting free ride.

When you factor in the cost of maintenance and insurance, unless you are getting a rental income that is about 130% of your mortgage payment, it is unlikely that the rental income is covering all of your costs each year.

Property investments will make you wealthy

This statement is probably more easy to justify as a fact rather than fiction but there are plenty of caveats to add rather than just making a general assumption that property is the path to your personal fortune.

Timing and your choice of investments will be an influential factor but the fact that Fortune magazine concluded in a study of millionaires that 97% of all of their wealth was either created or held in property is a pretty compelling statistic to suggest that real estate creates more millionaires than any other asset class.

Elizabeth Goldman is the editor of AlternativeInvestmentCoach.com. She has written for Investing.com, Bullbearings.com and many others.