Chapter 4: Risks Involved in real estate investment

You have to do your research on the expected risks. This will prepare you for your investment. You may also get to learn about how to deal with the risks well in advance. Risk analysis will also give you a realistic approach when you start on your investment.

The unpredictability of housing markets

There was a time when investing in real estate had some amount of guarantee. People used to buy property, develop it and after a while, sell it at a profit. However, in recent times this has changed. You may buy a property but fail to sell it at a profit. This is because the prices of houses keep fluctuating with changes in the economy. If the economy fails, the prices may considerably go down. This forces investors to sell their property at cheaper prices. Most times, this is normally at a loss.

It is due to this risk that investors are advised against investing more than they can afford to lose. For instance, it would not be advisable to invest your kid’s college savings into real estate. In case the house markets prices are affected, you may lose this investment and end up jeopardising the future education of your children.

No matter how stable or good the economy may seem, it is always good to plan for any changes that may occur in future. As an investor, you should always leave room for such occurrences. It is also good to set realistic goals and know that your investment doesn’t offer any guarantees.

In case of any changes in the market prices, be prepared to hold on to your property for a while. Sometimes, the economy may pick up again in a while. It’s not good to rush in and sell your property at a loss. However, if worse comes to worst, you may have to sell your property at a loss and re-invest the money.

Negative cash flows

It is very easy to end up with negative cash flow. You may invest in a property that doesn’t bring you any profits. This will mean that you will be spending money without making any money.

This is a big risk in real estate investing especially since there are no guarantees. You may get rental properties but fail to get tenants, for instance.

One way to cope with this issue is to be patient. You may have negative cash flows when you are starting out but like any other business, this may change with time.

Alternatively, if you realise that you aren’t making any money from the property, you should definitely consider selling it.

Unplanned emergencies

It can be really difficult budgeting for your real estate investment. You may set aside enough money for purchasing property and even renovating it. However, there are other expenses that may come up that you may not have planned for.

For instance, you may repair your house and get it ready for resale. However, something happens that makes your house require new repairs. These unforeseen emergencies are always a risk to investors. There is always a high chance that things may not quite go as planned.

To deal with this risk, investors are advised to set enough money aside to cater for any emergencies that may suddenly come up. It is not good to work with an exact budget that lacks flexibility.

Failure

Most people don’t consider failure as a risk. However, it is. Like in any business venture, investing in real estate isn’t a guarantee that you will succeed. There are many investors who have managed to make fortunes from real estate. There are also some who have failed and given up altogether.

Failure is a reality that every investor should plan for. It’s always good to put in place measures that will help you in case you fail to make profits.

You also need to be realistic. It’s not going to take three to four months for you to start getting your returns. There are investors who had to wait for over five years before finally making some profits.

If you fail the first time you try, you can learn from this and try again. Your second investment may actually work out. If you fail and get overwhelmed by the stress, you will not be able to re-invest again and succeed. You have to keep working hard and trying until you succeed.

Risks involved in rental properties

Most investors will tell you that one of the most lucrative real estate investments is investing in rental properties. By charging good monthly rental charges, you can manage to pay for your mortgage payments and meet any costs incurred in the maintenance of the property. Rental properties are also very profitable.

However, if you end up with bad tenants then this will be a definite risk. Tenants may fail to meet the rental costs and therefore fall behind in making payments. This may force you to use your own funds to pay your mortgage payments.

Other tenants may damage the property, therefore, forcing you to spend much more money in repairs. Some may completely ruin your property forcing you to resale it at a much lower price.

Another risk is failing to make any profits. Your rental charge may only be enough to pay your mortgage. Sometimes it may not even cover these costs. This happens especially when landlords are forced to charge less rents than they expected. For instance, if you have a rental property in an area that gets termed as being insecure, your rent may have to go down.

There is also the risk of not getting tenants. You may end up with vacancies which pose probabilities for losses since you will still have to meet the costs of the property.

Inability to resale property at a profit

Flipping property is a very popular type of investment strategy in real estate. There are so many investors who look for property to buy, fix and resale at a profit. For most people, this normally works very well since fixing up the property adds value. There are some who even get to sell at twice the purchasing price.

This is definitely a lucrative investment opportunity but it doesn’t come free of risks. There are instances whereby an investor may fail to get buyers for the property. They may also be unable to sell the property at a profit especially if they spent a lot of money on renovations.

There are also instances where investors spend too much money on purchasing a property. This means that getting a higher value for the same property during resale becomes very hard. Buyers simply refuse to pay the amount that they consider being too much for the property even after it has been repaired or improved.

There is also the risk of underestimating the cost of renovations. An investor may end up going over budget fixing a place and then fail to get a good price during resale. In other instances, the investor may even fail to meet the costs of the renovations and end up selling the property at a lower cost.

There is also the risk of investing in the wrong kind of property. An investor may also select the wrong location. This may force them to resale the property at a lower cost. They may also find themselves stuck with the property and unable to resale it at all.

The risks involved in investing in residential property

One of the most popular risks involved in this kind of investment is buying property without having done adequate research about it. You may end up buying a property in the wrong neighbourhood that poses a security risk.

You may also get the wrong location in terms of natural calamities. For instance, a homeowner may buy a house in an area notorious for tornados or hurricanes. In the eventuality of any of these calamities, they may end up losing the home or incurring losses due to the cost of repairing the damaged property.

There is also the risk of buying the wrong property in terms of the condition. You may get a very good price for a house without realising that it’s actually falling apart caused by ants, moulding or a number of other things. Such an investment may bring about losses to homeowners.

Corruption and fraudulent practices

There is always a risk of being conned. You need to be very careful when making your real estate investment. Don’t buy anything that you haven’t vetted out and seen in person. For this reason, avoid online transactions. You can’t buy a house that you just have a picture of.

Be very careful; make consultations and research on each property before making an investment. Take your time and avoid regrets.

You should also be very careful with all documentations. For instance, you can’t claim to own a piece of land until you have the title deed.

Be very wary of people who may be out to con you. Research and ensure that every transaction you make is legal. You should also ensure that you don’t end up buying ghost properties. You can do this by visiting the property before making any payments for it.