No one can disagree that real estate investment is one of the greatest ways to gain money and grow your wealth. From the freedom to the passive income, it’s an attractive way to make money on the side. However, while owning a rental property is generally a secure investment, investors need to understand that they may not always see success. This is due to the risks linked to this asset.
As a real estate investor, you have to be aware of these threats in order to avoid them, and ultimately, thrive in the industry. We’ve put together a few examples of the risks you can expect to encounter, as well as how to navigate them in order to maximize your real estate investment.
#1 General Market Risk
The real estate market has done reasonably well in recent years, but there is no certainty that this trend will continue. Similar to stocks, the real estate market is notorious for its ups and downs. The economy can significantly change the value of an investment, so there’s no certainty when it comes to whether or not you can profit from your property, should you decide to sell or rent it out.
To mitigate this, make sure to study the market. This will allow you to determine whether or not it’s the ideal time to invest, and evaluate the level of risk that comes with your specific property type. Additionally, you need to diversify your portfolio by purchasing other types of properties (such as apartments, condos, etc.) in case the market for one property type crashes.
#2 Location Risk
Location is key. Ask any property management agent or realtor, and they’ll tell you that the location is the most critical factor to consider. Investing in the wrong location can result in an unsuccessful real estate venture.
Although being in a decent neighborhood can be advantageous, you still need to consider the other factors that come with its location. Crime rates, unemployment rates, proximity to transportation, and population are all examples of factors that can contribute to the lucrativeness of your real estate investment.
The only way to mitigate this threat is by being cautious when choosing where to buy real estate. While it may be tempting to buy cheap property, remember to ask yourself if people will actually be willing to buy or rent it. If that area’s demand for rental is steadily decreasing, there’s no point in investing in that particular property.
#3 Vacancy Risk
Purchasing an investment property does not guarantee that you’ll have no vacancies. In every real estate investment, there is the chance of vacancy, which in turn can pose a threat to your rental revenue. The truth is that finding tenants takes a lot of work, and more often than not, it will take a lot of time, as well.
To prevent vacancies, it’s vital to research the vacancy rate in the area you plan to invest in. you should also partner with a property management firm to help you find tenants every time you have a vacancy. A property management firm will also conduct routine repairs, maintenance, etc. to ensure your tenants’ satisfaction. This will encourage your tenants to continue to rent with you once their rental contract ends.
#4 Tenant Risk
You can’t generate rental income if you don’t have tenants, however, that doesn’t mean you have to say yes to any tenant. Having a bad tenant may be worse than not having a tenant at all. And while it’s true that not having renters results in no rental money, do note that problem tenants can cause you to spend more in terms of eviction costs. They may also refuse to pay the rent, fail to care for the property, and more.
To avoid renting to bad tenants, screen every tenant carefully. Conduct a rigorous tenant screening process to check their credit score, bank records, criminal background, and more. Then, visit your investment property often to ensure that your tenants do not become problem tenants. If you find out that the tenant is not caring for the property, it’s best to rectify the situation as soon as possible. It also helps to prepare a contract that clearly defines the tenant’s duties.
#5 Asset Risk
Asset risk refers to the risk within an asset class. In real estate, asset classes can be classified by property type. Risk varies due to the demand for that particular property type. Residential properties, for instance, face lower risk as there will always be a demand for single-family homes, apartments, etc. People will always need somewhere to stay.
Meanwhile, commercial properties such as shopping malls face more risk since they attract a narrower tenant pool. The same goes for hotels that attract seasonal tenants. That’s precisely why it’s important to diversify your investment portfolio. You can invest in single-family homes alongside a shopping center. That way, in case one asset faces a downturn, you can offset your losses with your other asset.
If you want to play it safe (particularly if you’re a first-time investor), it’s best to consult a real estate professional. They can guide you towards the right investment – one that aligns with your goals. They’ll also take into account how risk-averse of an investor you are, as you may or may not be suitable for some assets.
Consult the Pros Before You Invest
One of the wisest things you can do is to consult a property management agent. At Luxury Property Care, we strongly advise against investing in real estate without first consulting a professional. A real estate professional will be able to weigh the pros and cons for you, and identify the threats to your potential property. They can point you to the types of properties you should invest in, as well as guide you towards the investments that are sure to have a greater ROI.