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Which Level of Risk Does Property Investing Fall Under?

Real estate investing is a great way to make money because real estate is safe, steady, and widely available. But there are several risks associated with this type of investment that can cause you to lose money down the road. These are the risks you should consider before investing.
Real estate investing is a great way to make money because real estate is safe, steady, and widely available. But there are several risks associated with this type of investment that can cause you to lose money down the road. These are the risks you should consider before investing.

Real estate investing is a great way to start or build on an investment portfolio and is generally considered a safe move. But when taking all of the associated risks into consideration, it can be tricky to navigate which type of investment might make sense for you based on the risks you’re looking to avoid. Below, we outline two different ways to invest and the risks associated with all real estate investments.

Rental Property Investments vs Real Estate Investment Groups

Purchasing rental properties can be a lucrative business, especially when rents are priced right. Be sure to take mortgages, loans, taxes, and maintenance costs into consideration when determining a rental price for tenants. The trick is to still stay competitive with other property rents in the area, however.

Though a lot of work goes into owning and managing a rental property investment, this is a good move for those looking to remain in control and hands-on with all aspects of their business endeavors.

If you’re looking to make a real estate investment but want to avoid all of the duties surrounding maintenance and tenants that come with being a landlord, then an investment through a real estate investment group could be the right move.

Another option for hands-off investors is a real estate trust (REIT). REITs are similar to stocks and involve either a corporation or a trust that buys and manages properties with the funding from individual investors. By law, these trusts and corporations must pay out at a minimum 90% of income as dividends, giving investors the promise of steady income.

Joining one of these groups will allow investors to purchase large properties,or even a few units of different properties, and then take a step back while a management company handles all of the marketing, advertising, maintenance, leasing, and tenant duties.

However, with all types of investments, follow risks.

Asset Types

There are different levels of risk to be weighed by asset. For example, apartment buildings typically offer a low risk because multifamily housing has a steady demand even when the market is poor. Hotels and vacation homes that are reliant on tourism and seasonal changes can be unpredictable and risky because of vacationers’ short stays and periods of vacancy.

Construction

Investing in real estate can many times entail unforeseen construction costs. Structural problems when purchasing a property, or issues down the road, can lead to expensive projects for buyers. Construction can be tricky because in addition to being costly, it also poses a risk for vacancy.

The most important step in avoiding huge problems here is to get a professional appraisal and home evaluation before making a purchase. Whether it’s a professional home appraisal or a commercial investment appraisal, this is a non-negotiable step in the purchasing process for avoiding a big financial risk.

Market Stability

Real estate is notorious for its ups and downs, and changes in the economy and market over the years will affect all types of investments. This lack of a guaranteed market puts investors at risk for selling properties for less than they were purchased for. Selling for less than the original purchase price could negate any rental income, and has the potential to cost you even more than earned.

Inflation, interest rates, and ever-changing real estate markets can take a hit to your bottom line. The best way to avoid this risk is to stay in the know about the market economy, track when real estate demand is high, and prepare in advance to buy and sell in line with the market forecast.

Vacancies

One of the most important pieces to earning income through an investment property is renting it out. This, of course, means a vacancy in your property poses the risk of a vacancy in your cash flow. Buying in a location in high demand with great nearby amenities is the best way to avoid vacancy risks.

Tenants

Irresponsible tenants can cause major headache for investors. Damage done to a property, tenants who aren’t paying rent, and evictions are all costly problems one could face. Screening and finding the best tenants is the only way to avoid problems down the road.

Depreciation

A drop in the value of a property down the road is always something to consider when making an investment. In most cases, property values are expected to increase over time. But not all are properties are guaranteed to.

Working with a real estate agent to draw up a market analysis before investing is the best way to avoid losing money on properties that have potential to depreciate in value over the years.

Foreclosure

When investors can’t meet mortgage payments on time, properties are put at risk for foreclosure. Lack of income from vacancies or construction periods can certainly put a property owner at risk to lose the investment to the bank. Foreclosures have long-term detriment, as they can hurt an investor’s future loan approvals down the road.

To clear any roadblocks that could prevent risky situations later, soon-to-be investors should partner with an experienced, local real estate agent for guidance and support as they break into the game, learn the ropes, and scale their portfolios.

 

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Ben Mizes

Ben Mizes is the co-founder and CEO of Clever Real Estate, the free online service that connects you with top agents to save thousands on commission. He's an active real estate investor with 22 units in St. Louis and a licensed agent in Missouri. Ben enjoys writing about real estate, investing, personal finance, and financial freedom. He's a serial entrepreneur, having run several successful startups before Clever Real Estate. Ben's writing has been featured in Yahoo Finance, Realtor News, CNBC, and BiggerPockets.

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