Influencers make being a landlord with lots of rental properties seem easy. But a real-estate investor with 482 units warns newbies to not scale up too quickly.

• The prospect of easy money and equity lured people to invest in real estate between 2020 and now.
• Those who purchased rental properties in the last two years saw a windfall, a veteran investor said.
• But he warned that strategies that investors had relied on are no longer guarantees for success.

The prospect of steady cash flow and financial independence has lured many investors to real estate, particularly between 2020 and 2022, when low mortgage rates made borrowing a breeze and rents skyrocketed. 

But new landlords who follow landlord influencers on TikTok and Instagram extolling the merits of quick-scaling strategies could use a dose of reality, one veteran real-estate investor told Insider.

"Anyone that bought the last few years got a total windfall of rents going up this last year," said Mark Ainley, cohost of the Straight Up Chicago Investor podcast and partner at GC Realty & Development. He said his business owns and manages 482 apartments in the Chicago area. 

Indeed, the median rent for a one-bedroom apartment in the US climbed nearly 40% from $1,770 in July 2021 to $2,106 in July 2022. But rents are expected to soften — or even fall — this year as housing demand falls and the economy weakens.

Landlords and home flippers also face the rising costs of buying or maintaining a home in the first place, including expensive purchase prices, higher mortgage rates, increased insurance and taxes, and boosted price tags for renovations.

It all means that investors still have to play it safe when looking at a new deal, Ainley said.

The illusion versus reality with real estate investing

Investors with big dreams have turned to the "BRRRR" method — short for buy, renovate, rent, refinance, and repeat — to scale up their portfolios and increase cash flow quickly. They buy properties, fix them up, then refinance them to get out cash that they funnel into purchase the fixer-upper. But the BRRRR strategy isn't a surefire path to profit anymore.

Ainley said it's harder to find ideal properties — untouched or rundown ones badly in need of repair — for a renovation and subsequent refinance. 

"It's harder to spot a quality BRRRR. The banks and sellers 10 years ago left plenty of opportunity for the next person to make their money," he said. "It used to be very simple, but now you truly need to add some sort of value."

Even after value-add — a renovation or update that immediately boosts a property's value — you can't control what an appraiser or bank will determine to be the property's official worth on paper, Ainley said.

Higher acquisition costs and lower appraisals mean that investors are getting much less cash back out of a property during a refinance or sale. Simply put, there's just not as much meat on the bone — or easy profit — left for investors.

"At the end of the day, the riskiest part is making sure that you got that number right on the front end," Ainley said, suggesting that the success of a deal is determined by paying the best price when an investor first buys a property for a flip or BRRRR.

Patience is a virtue in today's real estate market

Despite the softening market, Ainley added, aspiring investors can still use the tried-and-true strategy of using an Federal Housing Administration, or FHA, loan to purchase a multi-unit building. An FHA loan allows a buyer to put down as little as 3.5% of the purchase price but requires that the buyer live in the building for a year. They can live in one of the apartments while renting the other ones out, he said.

Ainley said that smart investors should realize that rents and property values will not steadily increase in the near-term — they need to look further out.

"If you're looking out on a 20- or 25-year horizon, then yes, I think it's safe to assume it's going to do those things," he said. "But when you're looking at a two-year horizon? That's tough. And a six-month horizon? That's nerve-wracking to take on a big project." 

Ainley pointed to another problem in the world of real-estate investing: Some investors have found that it's a far easier route to sell crash courses on real-estate investing than it is to actually buy and fix up buildings themselves.

But it's another gambit that newbie investors should be leery of, he added.

"If you're good at it, you can get a lot more people to pay you $20,000 or $30,000 to show them how to invest versus trying to make $20,000 to $30,000 multiple times a year on deals," Ainley said.