What Are The Risks in Real Estate Investment?
- High illiquidity
- Worsening locations affect value
- Poor relationships with tenants
- The property can be a “money pit”
Real estate is one of the steadier places to invest your money. But nothing is perfect. Even though real estate is generally a safer way to invest your money, there are still certain risks that any investor ought to be aware of before they wade into the market.
Here are a few potential risks that you should know about real estate if you want to invest.
High Illiquidity
One of the most well-known sticking points about real estate, as an asset class, is that it is highly illiquid. Liquidity describes the ease with which the value of a given asset can be liquidated into pure capital.
A good deal of real estate investment is tied up in a property’s equity. Selling a home, for example, can take a very long time. When market uncertainty strikes, that time can change. Even when a house sells fast—as is the case in the market right now—it can still take over a month for the seller to actually get their money.
The high illiquidity involved in real estate can make it a riskier investment because investors have less access to their capital.
When your money is tied up in an illiquid asset, you don’t have the financial mobility to use that money for a better investment when the opportunity strikes. Furthermore, if the value of your asset starts to decrease, illiquidity prevents you from getting out while the getting is good.
Worsening Locations Affect Value
Value fluctuations are common market conditions in every sector. However, in the case of real estate, these market risks can be very difficult to reverse. Suppose the surrounding area of a given property starts to decrease in value. In that case, the value of that property is guaranteed to downturn as precipitously as the neighborhood at large.
The worsening of a property’s location is completely outside of an investor’s control. Many factors drive the economic health of a given real estate market. Job decline, crime, and mismanaged local policies can tank the value of the real estate in the area.
Neighborhood decline is difficult to reverse. While it can only take one negative factor to decrease property values, an increase in crime, for example, takes a multi-pronged solution to address the problem.
More often than not, these solutions are well out of the property owner’s control, so investors become helpless to affect the value of their assets.
Poor Relationships With Tenants
Depending on how you want to get involved in real estate, you may be in a situation where your asset is earning rental income paid by tenants leasing the space.
Finding a good, long-term tenant is the ideal scenario residential or commercial real estate investors plan for with their investment. However, the kind of tenant that a landlord may lease can always change.
If investors deal with bad tenants, then they can sustain some significant losses from their investment and, worse, additional fees that cut into the investment. The risk of dealing with bad tenants lies in the cost to the investors’ time and money.
The rigamarole of collecting rent from a late tenant, repairing damages they may have caused to the property, evicting them, or taking them to court is a drastic expense in both time and money.
The nightmare kind of tenant that would lead to this scenario isn’t all that common, but it is nevertheless a risk aspiring real estate investors must consider before buying a property.
The Property Can Be a “Money Pit”
Real estate investment is generally a long-term investment. Even short-term investment strategies can take up to a year when they move at their fastest.
One thing that investors must consider before getting into real estate is the amount of expense that goes into maintaining the value of their assets, and the amount of cash flow the rental property will generate. How these factors balance out determines your bottom line.
Particularly in the residential market, property owners must abide by certain livability standards before they can rent out the property, and prospective buyers will steer clear of properties that need a laundry list of repairs.
If you’ve bought a fixer-upper that requires more repairs than you anticipated, you can very quickly be sucked into an extremely costly expense that you can’t get out of. If the property suffers from chronic issues that need regular repairs, you could be holding onto an asset that’s losing you money instead of earning.
Property ownership boondoggles can strike at any time. A pipe could burst, a tree could fall on the property, and inclement weather could damage the property. These are all possibilities that investors must account for before they get into real estate.
Tips for Investing in Real Estate Safely
- Assess your finances before investing
- Learn more about real estate investing
- Find the right type of investment for you
- Consult a professional firm
Assess Your Finances Before Investing
Real estate investments tend to have a high financial threshold. The average sales price of a single-family home in 2022 was 507,800 last quarter. Even if you put a generous 20% down payment on a property, that could still be 50,000 dollars required of you even to get started, not to mention paying down the debt and other expenses.
Even more accessible real estate investment options like private equity funds require accredited investors with high financial thresholds to get started.
Any investment decision you plan on should only be after a sober assessment of your financial state. Taking the time to assess your finances allows you to invest with confidence. You can feel safer knowing that you can withstand potential losses by reaching a number reflecting your financial state.
After all, investing is about growing your money. So if you make the right decisions with your real estate investments, any sum will be worth your while.
Learn More About Real Estate Investing
If you’re considering an investment in the real estate market, learning more about the market, how it works, and effective strategies is a necessity if you want to avoid risk factors and volatility.
Real estate can be a complicated market to get into, so much so that it can be difficult to know where to focus one’s research on how it works. However, all that matters when you’re just starting out is doing just that—getting started.
One of the best ways to get started on the basics of real estate investing is by looking into educational resources promoted by real estate experts. That could be anything from reading up on real estate market trends in popular financial news sources and magazines or going straight to the source and seeing what the most effective investment firms and groups are doing.
At Christina, we offer diverse educational resources for curious investors. Get connected with some of the most insightful podcasts from thought leaders in the field and webinars that will give you a clear lesson plan on making better real estate investments.
From press releases on the market movements to educational literature, you’ll have everything you need to learn the fundamentals and cutting-edge strategies in one place on our website.
Find the Type of Investment That Works For You
Educating yourself about the market and how it works is one thing. It’s another to reflect on and determine the right kind of investment strategy for you.
When most people think about real estate investment, their first thought is toward private ownership of property. But there’s far more to real estate than renting investment properties or flipping houses, and plenty of ways to keep diversification as part of your property managementbusiness plan.
In fact, some investment opportunities in real estate, like private equity real estate funds, help investors avoid many of the risks of property investments, making for a safer investment overall.
Private equity funds are financial groups that use the pooled resources from their investors to acquire hyper-prime assets inaccessible to the average investor. They build a portfolio made up of high-value properties, usually in the residential and commercial sectors.
They will collect rent from their tenants, which is distributed amongst the investor pool in their annual returns, in addition to dividends from properties sold for a profit.
Investors are better protected against the risks commonly associated with real estate investment through a private equity fund. You don’t have to deal with tenants or maintenance issues.
Before diving into real estate investment, look at other investment opportunities, like private equity funds or REITs, so you can give yourself more options that might better fit your financial situation.
Private equity funds allow investors the option outside of private ownership that’s more accessible and less risky than outright ownership.
Consult a Professional Firm
If you’re lost in the woods without a clue on where to begin, all you have to do to get back on track is ask for help.
There are plenty of professional real estate investment firms that are happy to consult with new investors. Professional firms can provide you with quality insights about the market, where it’s currently, and where you ought to start.
Every firm is different. For every type of real estate under the sun, a professional firm approaches that niche with its strategy that might reflect your goals.
Invest With The Best
At Christina, we’ve learned to thrive in one of the country’s most competitive real estate markets for over four decades—Los Angeles.
Throughout our firm’s history, we’ve found the niche market that allows us to minimize risk for our investors to ensure that you don’t just get a safe return but a great one.
Sources:
Average Sales Price of Homes Sold For The United States | Economic Research