To this day, real estate is still considered to be one of the best long-term investments you can make. But in reality, most people actually lose money in real estate.

Many people think that real estate is this magical, tried-and-true, no-risk investment that is guaranteed to work out. After all, the top financial experts and banks rave about how profitable real estate is. As a result, inexperienced investors get caught up in all of the hype and throw their life savings in the ring, only to realize a few months later that the value of their property has gone down by 20%.

In other words, real estate has risks, just like any other investment out there. While it may be a safer option for investors to go into, there are still risks that you should be aware of if you are planning to go into it. Here’s an in-depth look into what you should be aware of, so you can minimize your risk and not lose money in real estate:

Why You Shouldn’t Listen to Banks and Financial Advisers

If you listen to financial institutions about what to invest in, you will most likely lose money in real estate. Ask yourself – why are financial experts and banks giving you tips on what to buy? The more people know about it, the more competition they will have. It does not make sense.

The reason is simple. Most people who invest in real estate do not have enough starting capital. As a result, they go to banks to get a mortgage in order to have enough money to buy a property. And banks know this. The banks know they can make money off of gullible first time investors, who don’t know what they are doing. 

lose money in real estate

Banks rave about how real estate is a wonderful investment opportunity, because they know they can attract more investors to take on mortgages. The more investors there are, the more mortgages they can give out. With those mortgages, they’ll charge you a monthly interest fee, which will take you decades to pay off. And the longer it takes you to pay it off, the more money they can make.

Remember that banks exist for only one reason: To make money. The truth is that financial advisers and banks don’t tell you when real investment opportunities arise. They want to keep it to themselves, so they can make the most profit from you. The only reason they would go public about an investment opportunity, is if there’s something in it for them. And by sharing ‘hot’ news about how great real estate is, they know they can attract people to take on lifetime mortgages and earn interest rates every single month.

You will lose money in real estate if you just listen to banks and financial advisers instead of doing your own due diligence and understanding the market yourself.

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How First Time Investors Go Bankrupt Overnight

The real estate industry is a fluctuating market. That means you could buy a house for $100,000 today, and it might only be worth $97,000 next week. This constant fluctuation means that property prices are never stable. And unless you are willing to deal with that up and down roller-coaster, you are better off putting your money somewhere else.

Especially in the year 2020, real estate is riskier than ever. For over a decade now, the price of real estate in the US has only gone up. This is known as a real estate bubble, and overtime, this bubble is getting larger and larger. Eventually, what will happen is that this bubble will burst, and the price of real estate will plummet with it as well.

What happens when the bubble bursts and the price of real estate plummets? The value of the property you invested in will decrease.

Studies show that on average, a recession occurs every 10 years. The last recession that occurred was in 2008, and as of today it has been 12 years since then. As of 2020, we are overdue for a recession and many analysts are saying that a recession is inevitable and will be happening soon. In fact, research shows that economists have measured expansion cycles for the past 165 years and none have lasted longer than 10 years — except this one.

You shouldn’t really invest in real estate if it requires all of your savings and all of your money to do so. Putting all of your money into real estate is a very risky decision. Especially with many statistics pointing to an imminent recession, your real estate that is worth $100,000 today might only be worth $60,000 once a recession occurs. That’s $40,000 you could lose in just a few weeks time. Is that an amount you are willing to lose?

No One Can Predict When Sudden Catastrophes Occur

Even if you’re looking to buy real estate and rent it out for some extra cash flow every month, there are numerous ways you can lose money in real estate. A house has many things in it that can go wrong. This could be things such as water pipes, electric lines, heater malfunctions and even insect infestations. These are all disasters that can spell catastrophe for your wallet and your home.

For example, having a water pipe burst in your home is a nightmare every homeowner fears. Water that leaks into the ground or walls can cause serious damage to the foundation of your home. Entire walls may have to be replaced, which are very costly and timely. And if you live in an apartment or condo and these leaks affect your neighbors, you’ll be liable to pay for their damages as well. 

In order to fix these kinds of problems, you would need to hire professionals that could easily cost you thousands of dollars. And even after repairs have been made, the house still may not ever go back to how it was before. Like a scar tissue that forms after a serious injury, there will always be evidence that something bad once occurred.

When you buy a property, you have no idea what kind of problems are hiding behind the walls of the house. There could already be a ticking time bomb of financial problems waiting for you, before you’ve even bought the property. That’s why investing in real estate is risky, because there are always things out of your control that you cannot predict. Only after they have occurred, do you realize the situation you are in.

Not Being Able to Make Your Mortgage Payments

Let’s imagine that the house is fine, and there won’t be any pipe explosions anytime soon. Even then, you still have to think about the possibility that you cannot get any tenants to rent from you.

When you buy a house on mortgage, you have a contract with the bank that states you will pay a minimum amount every single month. Let’s say that for a few months, you are unable to find any tenants to rent from you. Now, your new property is sucking money out of your wallet every month, on top of all the expenses you already have to pay. And as the months go by, you find yourself withdrawing more and more money from your savings account in an attempt to stall for time. It’s now a race between finding a tenant vs. having your savings account run dry.

lose money in real estate

Losing Your Real Estate Property To The Bank

For homeowners that are eager to own their first property and rent it out for cash flow, these are some of the problems they have to face. And in the situation where you can’t make your monthly mortgage payments, you might even lose your house.

If you don’t make your mortgage payments, the bank can foreclose your property and sell it off in order to recover the payments you have missed. And oftentimes, banks will sell it at a ridiculously low price in order to attract people to buy it. The worst part, is that you have no say in the matter. You have signed a legally binding contract that states the bank has the power to do whatever is needed to recover their money. And you are at their mercy. 

This is one of the reasons why most first time investors lose money in real estate, because they are unaware of all the things that could go wrong. They think about all the positives – what they have to gain – and neglect to think about what they could lose.

Selling Your Property at the Wrong Time

Imagine that it’s been a few months since you purchased your property. You haven’t been able to find any long-term tenants to help with your monthly mortgage payments, and your house is starting to become a liability rather than an asset. At this point, you’re forced to make a decision: Do you keep holding onto the property and lose more money, or sell it off and try to recover your losses?

Many investors have what I call seller’s remorse. It’s like buyer’s remorse, except instead of buying, they are selling. They’ll sell their property either at the wrong time due to a bad decision, or they’ll sell because they have no other choice. Their monthly mortgage payments are eating them alive, and unless they want to risk losing everything, they’ll have to sell their property.

Only… if they had held onto their property for just one more month, they would realize that it’s now June, summertime is here and suddenly, the property market is booming. Tenants are looking for homes that they can rent for the summer, because they’re on vacation or in town to visit relatives. Foreigners are in town because of a special yearly event and need a place to stay temporarily. Team Dan Lok is having a seminar in Vancouver, and eager entrepreneurs from all over the world are looking for an AirBnB to crash at for a week.

Just like you can’t predict whether or not your home’s water pipes will explode, you can’t predict when people will suddenly be looking for a place to stay. If you sell your home due to bad timing, you could find yourself with seller’s remorse due to all of the opportunities you missed.

Getting a Bad Tenant Who Doesn’t Pay Rent

Here’s another scenario which might seem good at first, but ends up as a disaster:

Let’s say you find a tenant who’s eager to move in and rent out your unit. He’s told you that he’s expecting to live there for at least a year, which means a year’s worth of rental income for you. You no longer have to worry about finding a tenant, and can finally start paying off your monthly mortgage payments. You two seal the deal, and he pays you a one time deposit equal to two month’s worth of rent, and moves in immediately. You’re happy, he’s happy, and everything seems well.

The third month comes by, and suddenly your tenant tells you he’s unable to make that month’s payment due to some cash flow problems. He has the money – it’s just that it got stuck due to international processing and he can’t do anything about it. 

“No problem, just have it for me by next month”, you say to him. Except next month rolls around and he still doesn’t have the rent. He makes up another excuse about why he can’t pay you this month’s rent, and you accept it reluctantly. And then the next month rolls by, and he still can’t make his payment. He comes up with a very convincing sob story of how his family relative recently passed away, and would appreciate it if you gave him some time to get through it. You buy his sob story.

lose money in real estate

Getting a Bad Tenant Who Doesn’t Pay Rent AND Damages Your Property

Now imagine that it’s 8 months in, and you’ve finally had enough of the late rent or no rent. You march up to your rental unit, pound on the door and demand he pays up on the spot or you’ll kick him out. But to your surprise, the door swings open as your fist pounds the door. You open it fully, and step in cautiously. 

“Hello? Is anyone home?” You ask nobody in particular, a gentle breeze blowing through the now empty apartment.

Empty apartment. 

And then it hits you like a truck. You’ve been scammed. Overnight, while you were sound asleep, he got some of his buddies and a moving truck to help him pack up. All his belongings are now gone without a trace, and with it, your rental income. You’re now over 6 months behind rent, and the weight of your missing mortgage payments suddenly collapses on your head like a ton of bricks. 

Even worse, is that on closer inspection, you realize he’s caused damage to your unit – damage that will be expensive to fix. There’s a hole in the wall, most likely from where his foot went through it. The toilet has overflowed, and the laundry machine won’t even start. You’re not only behind on your rent – now you have to cough up the money for damages as well. Overnight, you’ve found yourself knee deep in sh*t – literally and metaphorically.

Bad tenants are another reason why many people lose money in real estate. You can do all the research you want, plan ahead as much as possible, but there will always be factors that are out of your control. 

You Discover That Bank Interest Rates Have Suddenly Increased

Suppose you’ve been just barely able to pay your monthly mortgage payments. Your tenant is not a prick, pays on time and keeps the unit tidy. No water pipes have spontaneously exploded. This tenant has not damaged your property. Everything is going well.

That is, until you open your mailbox and there’s a letter from the bank, telling you that starting March 1st of 2020, all mortgage interest rates are increasing by 0.3%. Uh oh – that means your monthly payments that you’ve been just barely able to pay off, are now higher than what you can afford.

lose money in real estate

You already know what can happen if you don’t make your monthly mortgage payments, and you’re not willing to go down that route. So you think about increasing your tenant’s rent, only for them to tell you that they won’t be able to afford it and will move it if you do. You’re short on cash, next month’s payment is on your mind and you’re caught between a rock and a hard place. 

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A Nearly Risk-Free, Alternative Investment Option To Real Estate

It is very common for first time investors to lose money in real estate. There are a host of problems that can occur – from water leaks that damage your walls, to bad tenants that won’t pay up.

If you’re looking to invest in real estate, there are many factors to consider. At the end of the day, it may not even be worth the risk. However, for those who are interested in investing in real estate without the risk, there are tax lien certificates. 

Tax lien certificates are a form of real estate investment that allows it’s holder to collect interest rates on homeowners. For people who aren’t looking for a large amount of startup capital to invest, tax lien certificates give investors the ability to invest in real estate at a lower risk. You won’t have to worry about bad tenants, sudden catastrophes or the possibility of losing your house. You’ll get all the benefits of a steady monthly paycheck without any of the risk that comes with it.

If you want to learn more about tax lien certificates, click here to learn more about my upcoming live event: Secrets of The Rich.