Part-time real estate investing can be very profitable. However, the best returns are mainly a result of three key factors that are easy to overlook when investing in real estate: leverage, sweat equity and higher risk.

It’s easier to get financing to buy real estate than stocks, because real estate tends to be less volatile and easier to appraise, and it generally produces more current income. It also rarely drops drastically overnight, as some stocks do from time to time.

Leverage helps at times

Proponents of real estate investing say that if you buy a property with a 10% down payment, and it goes up 10% in value, you’ve doubled your money. However, this claim neglects the costs of selling (up to 5% or 6% for real-estate commissions, plus lawyer’s fees and related expenses). It also overlooks any negative cash flow you may have experienced when you owned the property because your rental income was not enough to cover your expenses.

Eventually, your rental income may rise to a point where it covers your mortgage, taxes, maintenance and other expenses. You may have a big capital gain, but it can take many years to get to this point. Meanwhile, you have to “feed” your property, as real-estate investors say – that is, invest additional funds to cover the shortfall between your rental income and your expenses.

Sweat equity is still a cost

“Sweat equity” refers to the time you have to spend dealing with tenants, arranging for maintenance, doing your accounting and so on. You can hire others to do these tasks, but this can add more expense. You might say that real estate is something of a cross between an investment and a part-time job.

How Successful Investors Get RICH Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor. How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Higher risks

There are other risks associated with real estate investing: real estate is illiquid, expensive to manage and buy or sell, and highly geographically concentrated. In addition, rising crime, unpleasant neighbours and other changes in the neighbourhood of your property can make it hard to find tenants or buyers. So can physical problems, like nearby sinkholes, adverse traffic patterns, backed-up sewers and zoning changes that allow undesirable development, or limit what you can do with your property.

Many people start out in real estate with high hopes and wind up selling a few years later with little profit, if not losses. They have turned into what industry refers to as “don’t wanters”: investors who have become discouraged by risk and management problems, and who want to get out of real estate as soon as possible.

Real estate fortunes have been made buying so-called “distressed properties” from such sellers. In real estate investing, this takes a lot of patience, shopping and haggling, on top of the usual demands of the business.

Most real estate investing millionaires earned their profits by taking on a lot of risk, worry and work. They also went into it with realistic expectations and the intention of sticking with it for many years.

Many also owe at least part of their real estate investing success to timing: they bought when real estate had been in the doldrums for years. If you buy at or near the end of a boom in prices, you may need to wait for a subsequent boom before you can sell at much of a profit.