It’s a tough racket for the uninitiated or risk averse.

For Example…

The relationship I had with my chosen profession for most of my adult life could best be characterized as a love hate.

I’ve written about The Ten Things I Love About Real Estate.   It’s only fair I write about The Ten Things I Hate About Real Estate

1. Stress

Real Estate has got to be one of the most stressful career pursuits there is

Although Property managers have a more stable stream of income, they deal with a different type of stress.  The stress created from dealing with angry tenants, fair housing laws, trip and fall liability, habitability issues like mold or bed bugs, oh, and the always disgruntled client who expects more cash flow on their property and blames you.

2. Risk

There’s risk at every turn in real estate

I know, there is risk in everything.   Like driving to work or flying in an airplane.   However, as a profession, and something you tie your livelihood to, I believe a career in real estate has got to be one of the riskiest.

Real Estate agents and lenders literally don’t eat or pay rent if they can’t close deals.  So every day they wake up to pursue this profession, they are making a major bet on themselves.  In many cases, dealing with forces outside of their control

Property managers deal with the daily risk of tenant lawsuits for habitability, trip and fall, and fair housing biases.   This is especially compounded when they are managing properties for clients who either don’t have, or refuse to spend, the money to fix deferred maintenance or life safety issues.

Real estate investors take the biggest risks of them all devoting their time and capital to the pursuit of investments.   Hoping they’ve made the right decision on what to purchase, what price to pay, how much capital to invest to make the property better, how much of a loan to put on, how to execute a management strategy, hoping they have not overlooked any surprise expenses and hoping they haven’t bought at the end of a real estate cycle they can’t control.

3. Debt (Loans)

Loans, the sword that cuts both ways

Most real estate is purchased using a loan.   The typical loan for a home you are purchasing to live in is a stable 30 year fixed mortgage.   Your interest rate and payment never change.  Easy to plan and budget for.   The same holds true for rental properties between one and four units.

However, not so for commercial and apartment buildings.   Loans for these types of properties have shorter fixed rate periods, and sometimes shorter maturities.   Meaning, your initial fixed rate loan will ultimately shift into a much more uncertain adjustable rate loan which could be at a much higher rate, creating much higher loan payments, which you have to cover with the same rent amount from the tenants.

Even worse, commercial loans have shorter terms which means you are forced to refinance them in as early as ten years, unlike the home loan which pays itself down to zero by the maturity period.   If interest rates are much higher when you are forced to refinance, you could see most or all of your net cash flow evaporate

Oh, and if you miss consecutive payments, the bank will gladly take the property over from you, wiping out any equity and profit you built up.

4. Downturns

The inevitability of the real estate cycle can have devastating effects

I don’t remember where I heard the quote, but it summed it up perfectly.  It goes something like this:

“ Real Estate is 90% luck and 10% timing” 

It’s clearly meant as a tongue and cheek quote, but there is some real truth to it.   I’ve personally witnessed some of the smartest, well capitalized real estate investors get crushed in a real estate downturn (e.g. S&L crisis of the 90’s, the Great Recession of 2008).

Conversely, I’ve seen the dumbest, most ill-informed investors strike it rich with nothing other than sheer dumb luck.

A severe real estate downturn can test the limits of even the savviest, well-heeled investors and this creates an element of risk and uncertainty that takes courage to handle.

5. Never Stops

Real Estate is a 24/7 business

Any real estate agent or lender is fully aware, the real estate business never stops.   If client demands, or deal negotiations, or showing property, or making deadlines aren’t hijacking every waking moment, then your mind racing at all hours of the night on what you need to do, how much money you aren’t making, and how you should have taken another job, certainly will.

6. Tenants

You depend on them to pay rent, but man are they a pain in the ass

You’ve finally taken the plunge into buying your first investment property.   You’ve learned the market, cobbled together the down payment, scoured properties to purchase, made dozens of offers, overcome your fears, and bought your first property.   Then you spent countless hours and thousands of dollars renovating it.

No sooner do your first tenants move in and they are complaining that the heater is hot enough, the water isn’t wet enough, the toilet doesn’t flush fast enough, their neighbor walks around in his underwear, and they are really concerned about tripping on the crack in the driveway (which is code for we have no problem suing you).

7. Regulations

From rent control to city mandated inspections, dealing with regulations is not fun

Owning real estate is hard enough without the state and local governments making it even harder.

Recently, California and various cities throughout California instituted rent control.  Don’t get me started on rent control.  I will be writing at length about my feelings on rent control later.

My issue is when these governmental institutions essentially change the rules of the game half way through the game.   It’s one thing if I knowingly choose to invest in a market that already has rent control.   I know the rules of the game and will structure my investment strategy accordingly.

It’s when I’m already invested in a market where rent control or some other punitive regulation is created that essentially rewrites the rules of the game with sometimes catastrophic consequences.

8. Attorney Insurance Scams

Ambulance chaser attorneys cost the industry millions

You may read this and immediately be offended.   After all, what’s wrong with attorneys that are protecting tenants’ rights from slumlords and unscrupulous landlords?   Nothing at all, I say.   They are a value to society.

I’m talking about the “ambulance chaser” bunch.   I’m talking about the attorneys who make a business from taking on dubious tenant claims of trip and fall events that never occurred, or habitability issues in a tenants unit that the tenant themselves created.  A business where they know that a simple threatening letter to a landlord’s insurance company will oftentimes result in a pay day as the insurance companies are quick to resolve these types of issues, without merit, rather than fight it in court.   The attorneys know this and they exploit it, wreaking havoc in the industry and driving everyone else’s costs up.

9. Management

You just bought your first investment property, now what?

Probably one of the most underrated and underappreciated aspects of real estate ownership, and one of the most crucial to success, is property management.

Property management is far more than just collecting rent and paying expenses, hoping you have some left over for yourself at the end.  Effective property management involves creating a desirable habitat for your residents, finding that balance between charging max rent and having vacancies because you pushed too hard, finding reliable and cost-effective vendors and handymen to work on the property, having proper insurance coverage, sales and marketing, solid accounting and reporting, and much more.

As I built my portfolio of properties, I realized how difficult a task this is, and how hard it is to find good property managers, so I started my own company.   Very reluctantly.

10. Fees

So many hands are in the real estate cookie jar

Have you ever bought a property and really looked at the closing statement?   Lender fees, title fees, escrow fees, notary fees, recording fees, city and state transfer tax, legal fees.  Not to say these various service providers haven’t provided a valuable service.   But in the aggregate, they can often represent a substantial portion of the overall cost of the property.

So these are some of my most hated things about real estate.   That said, it’s still a profession I love, and one that has been very good to me.   I guess everything in life has its pros and cons.

Scott K Raymond