The 10 great risks of real estate investment
It is undeniable that investing in real estate is an excellent way to generate money and wealth. But what about the risks of real estate investing?
Buying and owning investment property allows you to earn passive rental income. However, not all real estate investors succeed in this competitive market.
As with other investments, there are some risks associated with real estate investment that it is important to highlight in order to find the best property and be successful in this business.
Without further ado, here are the top real estate investment risks and how to avoid them.
Bad location
You may have heard it by now, but… in real estate investing, location is EVERYTHING.
Most seasoned real estate investors know that location is a primary factor to consider when investing in property.
Now, how can location be a risk in real estate investing?
Supply and demand come into play first. You may think that a location is suitable because of its low prices. But this is sometimes that there are too many properties available in that area, that it does not have a growing population or that it does not have a good labor market. This is why these locations are often associated with great risks for the best real estate investors.
It is also advisable to avoid locations with high crime rates. While these areas have more affordable prices and high location rates since they tend to rent rather than buy. At the same time, if you invest in a high-crime area, you could face the risk of being vandalized or stolen, involving unexpected expenses and high repair costs. Not to mention the complex legal issues as a result of these acts.
Avoid this type of risk by carefully choosing the location for your real estate investment. Avoid the temptations to buy a low-cost property, as it is rarely worth the risk.
Unpredictable real estate market
The real estate market does not stop growing year after year. But this trend is not a guarantee that the economic conditions of this factor will remain on the rise.
When it comes to investing in real estate, the economy plays a major role in the value of an investment property. Therefore, there is no guarantee that you will make a profit when you decide to sell an investment property.
Real estate investors should always keep an eye on the dynamics of the real estate market to prepare and act in advance of any recession and help you determine if buying a property at any given time is the right decision.
Vacancy risks
When you invest in a property it doesn't mean 100% automatic occupancy or quick profits.
In real estate investing, there is the possibility of a large number of vacancies. This is a significant risk to rental income that can lead to negative cash flow.
Avoiding this risk is possible when you buy a property in a good location with high demand. How to differentiate these locations? Choose safe neighborhoods with nearby services, shopping centers and schools.
Negative cash flow
When we talk about real estate investments, investment property cash flow is the amount of profit you make as an investor after paying off all expenses, taxes, and mortgage payments.
While it is desirable get a positive cash flow, this risk is associated with the possibility of generating a negative cash flow. This assumes that tax expenses and mortgage payments are higher than rental income. This is a waste of money.
It is important here to be thorough and pay attention to even the smallest expenses that can accumulate in the long run. Make sure you correctly calculate your cash flow and rental income based on monthly expenses.
Unwanted tenants
Money is the basis of any investment, including real estate investments.
The basis for this is to get tenants, although this does not guarantee profitability either. The risk of having an unwanted tenant could be even worse than the risk of having no tenant.
It is true that not having tenants means not earning rental income. But on the other hand, a bad tenant can refuse to pay rent for several months or even seriously deteriorate your property. This is risking potential evictions, which are costly and time consuming.
Select good quality tenants carefully. Go through a thorough screening process to verify your credit score and gather the contact information of your previous owner.
Lack of liquidity
Liquidity is the ability to access the money within an investment. In real estate investment one of the risks of real estate investment is that the properties are not liquid. You cannot easily convert them to cash.
Selling a property is a slow and complex process. And trying to speed it up will likely result in a loss of investment.
Hidden structural problems
Investing in a property with serious hidden structural problems exponentially increases the chances of having to face unexpected repairs and maintenance costs.
Avoid this risk by requesting a good evaluation of the condition of the property in which you plan to invest, as well as a home appraisal before purchasing the property. Professional appraisers can uncover hidden damage or problems that need to be fixed. And most importantly, they will tell you the value of your property of your potential investment.
Foreclosure
If an investor is unable to commit for several consecutive months to their mortgage payments, this can put the property at risk of foreclosure. A foreclosure is synonymous with being able to lose your property to the bank.
This is a risk that can seriously hurt you when you get bank loan approvals later.
Avoid the risk of foreclosure by making sure you do a prior market analysis and have an emergency fund so you can pay off your mortgage payments quickly if applicable.
Depreciation
It's logical: depreciation is the opposite of appreciation. And what is usually expected when you invest in a real estate property is that it increases in value over the years. That is, that its value is appreciated.
However, nothing guarantees that a property will increase in value. Therefore, you should avoid the risk of investing in a property whose value may fall in the future or what is the same, that you end up losing money.
Just be careful in your research, study economic growth, and find a location with strong positive real estate appreciation.
The reality is that owning property can be a relatively safe investment. However, investing in real estate can never guarantee 100% a profitable investment. The most common above real estate investment risks should always be kept in mind.