The Psychology of Real Estate Investing

David S.


Real estate investing is no different from any other business. In fact, a slight shift in mindset can be all you need to overcome limiting beliefs and get your first income-generating property.

A common limiting belief among real estate investors is analysis paralysis. Analysis paralysis is a term that describes when too much information makes it difficult to reach a decision. This can be problematic, because the longer you wait to make a decision, the less time you have to act on it.

The returns from real estate investing generally accrue over time and only if you purchase judiciously and invest enough to properly maintain properties (which means more than just buying low priced houses).

But the normal trajectory for new investors is to buy a B-class, single family home that doesn’t cost much and rent it out for a modest price (about $1,000+). You hold this until you have enough cash to buy another low-priced property because you have always been told that debt is bad. You are your own Realtor and property manager. You do everything you can to minimize costs. The problem is that this isn’t passive income at all! Over time, when a sudden market upheaval affects your cash flow, you can’t wait to rush out. This was the experience of many small investors during the Covid-19 pandemic.

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The truth is, real estate investing is a risky business. The market can be unpredictable, and your investment could depreciate. Supply and demand, the economy, demographics, interest rates, government policies and unforeseen events all play a role in real estate trends including prices and rental rates.

But here’s the thing: none of these really matter when you’re focused on long term returns.

Why Real Estate Creates 90% of Millionaires

If you’re looking to build wealth, real estate is a great way to do it. Real estate tends to increase in value over time, and while it’s not a liquid investment (you can’t just sell it at any time you like), it offers tax benefits and protection from inflation.

One of the original steel tycoons of the 1800s and early 1900s, Andrew Carnegie, once said that “90% of all millionaires become so through owning real estate.” It has become a very popular real estate wealth statistic. While it hasn’t been proved, we know that it’s true that countless millionaires have been created through real estate investing. In fact, Andrew Carnegie himself was a wealthy real estate mogul who built one of New York City’s most treasured music venues with his wealth.

The thing about real estate is that it doesn’t lose value when inflation hits—in fact, it may even increase in value during times of uncertainty, because it’s seen as a safe investment. And you can take advantage of the tax benefits: real estate assets are depreciable, and you might be able to claim depreciation on your tax return.

With accelerated depreciation, you can claim the total depreciation over the lifespan of the property within the first five years of owning it; this greatly reduces your net taxable income. You can even defer capital gains taxes if you sell via a 1031 exchange if you purchase a comparable investment property within 180 days of selling the first.

So Why Do Many Property Investors Fail?

Just as with any investment, real estate investing has risks. Property owners can lose money if they are not careful. Here are a few of the reasons why this happens.

1. Unrealistic expectations

Real estate investing can be very lucrative, but it’s not a get-rich-quick scheme. Success as a real estate investor demands patience and discipline. Too many self-proclaimed gurus pitch “how to get rich in real estate with no money” courses, leading their followers to believe they can become rich quickly without effort. The only ones making money in these situations are the gurus themselves.

2. Underestimating costs

Rental investments require a certain amount of capital, as well as some sort of reserve. Before bidding on a property, it is advisable to make a list of all the estimated monthly expenses related to operating and maintaining it.

Everyone wants to buy a property for the same reason: They think it looks like a good deal. But these days, the word “deal” is rarely associated with buying real estate. Instead, most people are finding themselves in over their heads financially and emotionally. If you want to learn how not to become one of these people, join a local real estate investment group–like RealWealth–and find a mentor who can help you make the right decisions from the start!

3. Poor financing choices

Many people who take out adjustable-rate mortgages (ARMs) or interest-only loans eventually get burned when interest rates climb up. Don’t let that happen to you. Make sure you have the financial flexibility to make payments (if rates go up) or a backup plan to convert to a more conventional fixed-rate mortgage down the line.

What Is the True Cost of Real Estate Investing?

First, how much do you want to pay? What kind of home are you looking for? How much can you afford?

Second, how much will it cost to maintain? Are there any structural problems? Can you handle the cost and hassle of repairs?

Also, understand that while real estate prices have a general upward trend, a downturn in the market could cut the value of your investment significantly and it could take years to recover.

If your goal is to flip houses or do short-term buys, it’s understandable and prudent to obsess over short-term market cycles. Flipping houses, probably the fastest way to build wealth in real estate, is also the most audacious, and you can lose all your money as fast as you invest.

But if you’re looking to buy real estate and hold it for a longer period of 15-20 years, trying to time a market cycle is much less important to overall returns.

Instead of focusing on what so-called experts are saying about the economy, it’s better to look at the fundamentals. A lucrative opportunity can easily be missed if you over-analyze the market or get caught up in trends. Let’s take a closer look at the fundamentals.

1. Your most important tool for real estate wealth creation is your mindset.

Kevin Gates said, “True wealth is not of the pocket, but of the heart and of the mind.”

This is true for real estate investing as well.

The way you approach investing determines the bulk of your results. It has little to do with market fluctuations or anything else.

A crucial mindset for real estate investors to cultivate is the mindset of an entrepreneur. Many people involved in real estate investing have a dabbler’s mindset. They’re focused on cutting costs, saving money and avoiding risk. They want to keep their taxes, fees and expenses low. They want to minimize spending and maximize income; protect what they already own. Their priority is to survive, and maybe grow when possible—but not too much!

A business mindset is different from a hobbyist’s mindset. A business owner aims to grow their business: they create a business plan, a strategy, and an operations plan; they work at building a network of contractors, lenders, advisors and service providers they can rely on; they hire employees to do some of their tasks; and they invest in training and technology.

2. Inflation will always be at play so timing the market is a way to lose time.

Inflation is a blessing and a curse.

The blessing is that it leads to higher home prices and creates an environment where mortgage rates are usually higher and fewer buyers are interested. This environment is positive for investors who already own real estate assets or have a real estate IRA (Individual Retirement Account). As inflation rises, the cost of existing debt decreases.

The curse is that inflationary pressures can lead to an economic downturn, and if interest rates rise your mortgage payments could become more expensive.

But investors who have a long-term perspective will always win, according to David S., a full-time real estate investor and an investment advisor at Realwealth. “You can either harness inflation or fight it,” he says. “Short-term rationale and anxieties will cloud long-term goals and prosperity.”

3. You can't save your way to wealth.

Let’s face it: saving your way to wealth might have been a decent strategy when you were 11 years old, but it isn’t an effective one when you’re a busy professional trying to create financial security. After all, saving is essentially just putting money in the bank–and that’s not going to get you very far.

That’s because cash doesn’t grow as fast as inflation does. Over time, the purchasing power of your money will steadily erode.

People who understand how to make money work for them don’t save–they invest. By doing so, they make much better returns and build a lasting legacy. However, while most people understand that investments give a better return than savings accounts, the thought of gambling with their hard-earned money is enough to stop them from ever taking action.

4. Debt is an asset.

If you listen to Dave Ramsey or Engelo Rumora, you will probably conclude that debt is something to be avoided. But the truth is, there are good debts and bad debts. Good debt is debt used to acquire an asset that increases your future wealth. Bad debt is credit card debt, for example.

Good debt is an investor’s asset because it can be converted into equity/wealth over time. For example, a person who wants to buy a $1 million property can finance $800,000 of that price with debt and only put down $200,000 in cash. If the investment property generates enough cash flow, the owner can use the rent to pay down the mortgage. Over time, the $800,000 loan will be paid off using only the income generated by the property—without having to spend any of his or her own money! This is called leverage.

Your debt will be paid off in 20 years or less at which point the value of the real estate to which that debt is attached will have doubled.

5. Debt* Time* Scale = Real Estate Wealth

Debt, time, and scale are three concepts that are inextricably linked to real estate wealth creation. No real wealth is created without all three.

Real estate has proven to be a decent hedge against inflation when held long-term. This is because it’s considered an appreciating asset. However, you should be buying assets with higher expected returns and less risk with your 10 golden eggs (conventional loans).

Time is a superpower—it helps you harness inflation, amortization and other factors that can affect the value of your money. For real estate investors, the most prudent strategy is to commit to several years of ownership. As incomes rise and consumer inflation increases, property values will increase in locations where the population density is increasing.

However, understand that one or two investments won’t make you wealthy—even if those investments have high yields! How much passive income do you want to have in five years? It’s predictable; you can set goals now and start scaling accordingly. If you want to be wealthy in 20 years’ time, you have to start scaling today! Here is one strategy for scaling your real estate income.

How the Successful Investors Do it

Real estate investing is fundamentally simple but human beings are naturally inclined to complicate things. We’re hard-wired to think about risk, reward, and potential outcomes in the least optimistic light. But successful investors know the power of simplification—they focus on creating a well-defined plan, executing that plan with discipline, and then letting go of the outcome.

For investors who generate enough rental income from their real estate holdings to leave their jobs and focus on investing full-time. Here are some of the things they do differently on their real estate wealth creation journey:

1. Set SMART financial goals

Planning and implementation are the keys to success in real estate investing. As an investor, you should have clear goals for income and net worth based on your future needs.

You need to set SMART goals—specific, measurable, achievable, relevant, and time-bound. It is important to revisit your investment goals yearly. Experienced investors understand that investment strategies need to be reviewed and updated on a regular basis.

For the next twelve months, set a goal for the number of properties you will acquire, and create a plan for financing them. Remember that real estate comes with risk; if you buy multiple properties without setting aside enough money for expenses—including unexpected costs like repairs and vacancies—it could be disastrous.

2. Create a solid real estate investing strategy

There are a variety of strategies you can use to invest in real estate. You can choose to buy rental properties and hold them for the long term; fix and flip properties; or get into short-term rentals like Airbnb.

You want to find the right strategy for your unique situation and goals. Consider all your options, but once you’ve decided on one, stick with it until you reach your goal.

A well-written real estate business plan is a crucial step in the investment process. It outlines your strategy, including where and when to buy properties; how much you plan to invest; and what financing options will be available. A business plan is also essential if you need financing or partners.

3. Have the discipline to stick with a carefully prepared strategy for the long haul

Many real estate investors get caught up in the hype of a hot market. They make decisions that are driven by emotion rather than a rational and well thought out plan. They jump from one investment strategy to another quickly upon hearing any sort of bad news about their investments.

The most successful investors are those who have the discipline to stick with a carefully prepared strategy for the long haul. This usually involves holding onto your investments for a long time. According to David, “Short-term profits are for flippers and speculators; real wealth is made by holding high quality assets for many years.”

Another key factor in successful investing is diversification. You don’t want all your eggs in one basket, so to speak. If one property doesn’t perform as well as you expected, the others can help cover for it and keep your overall return on track.

4. Allow time to be their asset, not a liability

The time value of money is a financial principle that states that if you have money now, it’s worth more than that same amount in the future because interest rates and inflation reduce its purchasing power over time.

In the United States, inflation is about 3%. This means that if you put $1 in a savings account this year, it would be worth roughly $0.97 next year. Inflation raises prices on goods, so you have to spend more money on the same things. If your savings account does not grow at the same rate as inflation, then you are actually losing money because of how much it costs for goods to increase in price.

Compound growth occurs when the interest earned on a sum of money in one period is reinvested, resulting in an increase in the capital value of that sum. This increase contributes to the next interest payment, which then increases the value of the initial sum even further. It is the key to building generational wealth through real estate.

Let’s say a home is purchased for $100,000 and expected to increase in value by 3.5% per year. After one year it would be worth $103,500 (the original $100,000 plus $3,500 in interest). After two years it would be worth $107,122 ($103,500 plus $3,622). And the more time passes, the more its value increases.

Final Thoughts

In conclusion, real estate investing is a long-term game. It can be very rewarding, but you have to be willing to wait.

Don’t let emotions influence your investment decisions. Stick to your strategy and trust that it will pay off in the long run. A successful investor knows that fear, greed, and impatience are the greatest enemies of an investor. “Only when you combine sound intellect with emotional discipline do you get rational behavior” (Warren Buffett).

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