How to Navigate Real Estate Investment Risks
July 11, 2024
As enticing as the real estate market has grown to be, you must not deceive yourself into thinking that the investment journey is always going to be smooth. It will do you a great deal to always remind yourself that the market is one that is rife with inherent risks. This, however, does not mean that you have to be a victim of these risks before you can boast of being a successful investor. In fact, your success story in the venture is complete and appealing when you can boast of being able to identify these risks before they come and be strategic enough to navigate them and avoid running into pitfalls.
There are some very common real estate risks that you need to be aware of. This would help you develop a foresight and avoidance plan before they even arise. The first type of risk you should be aware of are market risks. Market risks could arise in the form of fluctuations in property value and rental incomes. Fluctuations in property value may have a positive impact on your profit margin, but also be aware that the flip side of this is that they could eat into your profit too. This sort of risk is one that you can bypass by diversifying your real estate portfolio so that when a class of properties suffers from a reduction in the market value, you could benefit from the other class you deal in until the previous one gains back stability.
There are also liquidity risks. Liquidity is simply being able to convert a property into cash or any equivalent without its value suffering in the process. Liquidity risks come up when you are starting to have difficulty selling a property. An example is when you have purchased a property and set a timeline to put it back on the market and resell it, but you have not been able to close any deals with any buyers. The property starts to stay with you longer than it should, and as much as holding on to a property longer may equal the property appreciating, you should also be very aware that certain properties may also start to lose value as a result of wear and tear. In this case, you may want to consider short-term rentals. If you have a house you want to sell but have not been able to, put it on the market as a service apartment where people can simply spend a night or two at cheaper rates. Also, be sure to always maintain a cash reserve for any need that may arise and stay flexible so you can easily take up new ventures and adapt.
There are also tenant risks that could arise from damages or non-payment. This is a problem peculiar to rental apartments, and it is a risk that could result in a huge loss. It is understandable that this may not be your fault, but remember that there is always a way to navigate any problem that arises, whether you find yourself in it or someone else does. What you need to do is thoroughly screen any tenant before you admit them to your property. A good question-and-answer session or background research based on their source of income and means of lifestyle is one that can save you from unforeseen problems in the future, especially with payment. You should also regularly check on your properties. You do not have to wait for the tenant to leave before you inspect it. A regular check would open your eyes to damages and impending losses that you may know nothing about.
As a real estate investor, the greatest favour you can do yourself is conduct market research at regular intervals so as to always be aware of what may or may not arise and also be very knowledgeable of the types of risks you are exposed to. Other types of risks include financing risks, legal risks, environmental risks, management risks, and so on. Beyond your knowledge bank that you can depend on, be sure to always seek professional advice and guidance. Stay informed, stay prepared, and you are set to navigate the real estate world of investment with confidence.