5 Risks in Real Estate Investing You Need 10 to Know About
A conclusive guide for you to spot & minimize the notorious risks of real estate investing and avoid suffering on your investment!
Real estate stands as the biggest investment industry in the US right now with about 35% of the Americans choosing real estate over stocks or bonds to pour their money into…
Investment in real estate- like any investment – comes with its risks (and rewards) and we’re not talking peanuts here… It’s literally thousands of dollars at stake!
The rule with risk goes, as they say, ‘with higher risks come greater returns…’
But, there’s no guarantee the returns will be positive – they could be negative too (that’s the very risk, isn’t it?)
Well, the point is not to scare you but to drive home that you can’t afford to look over real estate risks – because they are pretty real!
The good news is:
Once you learn how to identify those risks you can work to nip them right in the bud and make sure that you pocket big money from your investment!
That’s exactly what this article is going to teach you!
The 5 Risks of Real Estate Investment
Location is absolutely important in real estate and the more you stress its importance the less…
It’s a factor that decides your fate with the investment.
Choosing a poor location in real estate can mean you’ll forever regret investing in the first place and then wonder what went wrong and where?
The thing with a bad location is that you can neither move your property out of it nor can you change the location in its entirety…
In simple words you’ve got to suck it up and live with it!
Now, you must ask, ‘how do I avoid ending up with a bad location?’ Right?
The best thing you could do is research and study the market you’re interested in. Go around the location and see what the area is like.
Does it look like an investment opportunity that will bring in money?
Ideally, see and inspect every bit of the neighborhood before you go on to buy the place!
A lot of beginner investors in real estate think lightly (or not at all) of the structural problems their investment property might have – until they finally learn their lesson!
Structural problems in a property might turn your investment into a liability for you and costs of repairs on asbestos, leakage or seepage may be thousands of dollars…
So the point here is to inspect your property’s structure thoroughly!
Don’t cut corners on the structural inspection.
Spend as much is needed to hire the best property inspector and get him to report you on the condition of the property.
Spending here can save you from spending forever on the repairs post-investment.
Volatility in the Market
Real estate is a volatile market… It’s a jerky ride that goes up and down like a roller coaster. When it has touched the peak it comes down head-on – then back up!
And, between the peak and rock bottom states it’s not static but moving all the time.
Don’t worry, that’s absolutely normal…
The idea is to invest when the market is at its peak and avoid investing when it’s on a downward spiral (because that’s the time to sit back and enjoy the fruits)
Lots of factors contribute to unpredictability in real estate like the economy, interest rates, demographics, etc.
The best you can do is keep up with the latest developments in the market and be on top of all that’s going to affect your investment.
Being well-informed and well aware you’ll know when to buy or sell and when to invest or hold back!
Then you’ll be able to catch and go with the tide…
Negative Cash Flow
Sometimes a real estate investment might seem like a very promising one just because of its location, market price, structure, occupancy, etc.
But when you put down and compare the cash inflow and outflow you realize it’s not even breaking even!
The risk of negative cash flow is always there looming over…
If an investment predicts a negative cash flow outright rejection is best in most cases unless it’s certain that it’ll recover and generate positive cash inflow in future.
Negative cash flows can be caused by the repair and renovation costs, mortgage installments and many other factors…
And, to avoid such horrible surprises post-purchase a thorough analysis of costs and revenues of the property before buying it up is dead important!
You must keep one risk in mind before stepping into real estate investing:
‘The risk of being out of cash…’
Real estate investment is not like any investment (like stocks for example) where you can sell it for instant cash.
In property investing if you require instant cash you’ll be forced to sell the investment at lower than market rates and suffer big losses…
Though the liquidity risk is inevitable in real estate there are options you can go for in times of need.
You can run up a home-equity loan or cash-out refinance to get some cash while still being the legal owner of the property.
But, it’s always wise to consult with experts before taking out any kind of loan.
Also, imposing strict rules on the tenants to pay their rent on time can help keep the cash cycle rolling!
The Bottom Line!
If you can make sure that you succeed in avoiding the above risks in real estate the likelihood for you to ace real estate and rake in money goes over the sky…
But the problem with most first-time property investors is that they learn their lesson after the first blow – not before that.
By then they’ve been hit so hard that they never get the courage to stand back up.
Therefore, the above risks are (again) real.
And, only by steering clear of them can you make a fortune in property investing.
All the best!