You know what they say – the greater the risk, the greater the reward. This also applies to real estate, however, not all property owners are aware of it. Investors tend to dwell on the rewards since they’ve been told several times that real estate is a lucrative investment.
And while it is true that real estate can be a reliable source of income, earning isn’t always that easy. Like other kinds of investments, real estate has its risks.
There are several risks in real estate investments. In this article, we will discuss a few of them so you can decide if it’s a risk you want to take. Alternatively, you can have a chat with our investment advisors. They’ll be able to evaluate the real estate risks of your property so you’ll know whether or not it’s worth it.
#1 Real Estate Market Risk
All markets are at risk of fluctuations. They are, after all, connected to the economic conditions. And while the real estate market has gone up, there’s always that risk that it goes down. Therefore, it’s uncertain that you will turn a profit when the time comes to sell your property. It would be unwise to assume that property prices won’t go down. Unexpected events can occur, take for example the coronavirus pandemic that shook the entire real estate market. While rental homes were in-demand, nationwide home sales were at an all-time low.
However, what happens when it’s the other way around? In a few years, people might want to own a house, and the demand for rental homes will go down. You will need to determine whether you should sell the house or lower your rent.
For this reason, it’s critical to stay up-to-date with the real estate market, know how it works, and partner with a property management company. That way, you can anticipate the fluctuations and adapt to the market risk.
#2 Geographic Risk
Where the property is located says a lot with regard to its chance at succeeding. The worse the location, the worse the risk. That’s why every real estate investor will tell you to put location at the top of the list. This is because the geographic location is tied to population growth and demographics, among others. Therefore, if the property is in a bad location, you’ll be taking a big risk. The demand will be low, so you will need to lower your rental rate, as well.
As an investor, you should avoid locations that do not attract tenants. If you’re planning to rent out your unit, you should steer clear of areas where it’s more economical to own a house than to rent. With that said, the price-to-rent ratio can tell you whether your tenant pool finds it more affordable to own a home than to rent, or the other way around.
To avoid this risk, consult a property management company to know where you should purchase your properties. They will also assist you to find cheap properties for sale. But if it’s in a bad location, it won’t be worth it.
#3 Cash Flow Risk
Cash flow is not always positive. Positive cash flow is when the rental income is higher than the expenses. On the other hand, negative cash flow is when the rental income is lower than the expenses.
When the cash flow is negative, the property owner is at a loss. This can happen when the owner purchases a property without considering how much they’ll actually spend on it. In other words, they fail to account for their expenses, for example, their property management fees and taxes. Or if they do calculate it, they underestimate the costs.
Hence, it’s crucial to calculate the expected expenses. A property management company can conduct a real estate market analysis to make sure that you put money into your pocket, not take it out.
#4 Leasing Risk
It’s extremely risky to expect that your units will be inhabited 100% of the time. When your units are vacant, your cash flow will be negative since you won’t be exempted from your expenses. With that said, it’s also a risk to rely only on rental income. If cash isn’t coming in, you won’t be able to pay your mortgage, property insurance, and so on.
To mitigate this risk, make sure to purchase a property in a good location. You should also consider partnering with a property management company that can advertise your investment property to potential tenants, and ensure that your tenants stay. The key is to keep your investment’s turnover rate low.
#5 Tenant Risk
This has nothing to do with whether or not your tenants are “good” tenants. Whether or not your tenants are saints, they still pose a risk, particularly if you don’t know what their plans are, and if you’re relying on a single tenant.
There’s no assurance that your tenant will continue to rent out your unit when their lease ends. They’re free to leave, which puts your investment property at risk compared to a property with multiple tenants, like a condominium. This is because while you look for a replacement tenant, your bank account is at risk of running dry. On the other hand, if you have other tenants, one vacancy won’t be able to drastically affect your property’s profitability.
That’s why it’s wise to diversify your investment portfolio. If you’re a first-time investor, it’s natural that you’d want to invest in only one for now. However, you should eventually invest in additional real estate to ensure a steady stream of rental income.
Why Partner With Luxury Property Care?
If you don’t have the expertise when it comes to real estate investment, consult the experts at Luxury Property Care. We’re here to help you navigate the world of real estate investing and to guarantee that you put your money into the right property. Remember, real estate isn’t cheap, so it’s well worth consulting a property management company so you don’t make mistakes and unknowingly put your property at risk.