Real estate remains a popular investment option among many Americans. In fact, a Bankrate survey shows that real estate investing is a favorite among millennials, ranking higher than even stock options. This is because of the high returns associated with real estate investing.
As with most investments, real estate has its risks. A good investor should learn how to evaluate real estate investments before going all in. After all, assessing all possible real estate risks prepares the investor for even the worst-case scenario.
Property investing, for most people, is a way of creating a steady stream of income. Conducting proper property inspections and other investigations is the first line of defense in preventing major losses. Unfortunately, though, they can’t cover everything.
From market volatility to poor location to high vacancy rates, for an investor who wants to own a property, here are 8 real estate investment risks you should assess.
Real estate is lucrative, but certain properties can and do depreciate. Most investors make the mistake of assuming that value will always increase. Sometimes, though, investments can depreciate for an array of reasons. Government policies, economic changes, and unforeseen circumstances can all affect an investor’s expected returns.
The Covid 19 pandemic, which altered real estate investments nationwide, is a great example. Not all properties performed the same during or after the pandemic. The demand for commercial assets and properties in major cities declined, as shops, restaurants, and social centers closed down. Meanwhile, suburban and more rural communities thrived.
The fact is, the real estate market can be unpredictable. If you educate yourself on the ebbs and flows, however, you can start making smarter investments and hedge your bets.
The wrong location can ruin a real estate investment. Of course, one of the most important factors to consider in real estate investing is the location of a property.
An investment property’s location is a major factor in determining return rates, so it is too risky to settle for just any place. While it can be tempting to buy properties in strictly A-Class neighborhoods with no crime, the right decision isn’t quite that simple. Clarify your investing goals to help determine where to find suitable properties. Then, consider visiting in person. If that’s not possible, at least research local school systems, nearby commercial real estate, local employers and job rates, crime and other public statistics, and the area’s potential.
Choosing a location that aligns with your goals can help mitigate risk and ensure your investment pays off, whatever that means to you specifically.
Suggested reading: 6 Factors to Consider When Choosing a Neighborhood to Invest In
Of course, there is always a chance that the property you choose is a dud. Purchasing a bad property almost always saddles the owner with loss or unnecessary expenses. Location is a major determinant of the amount of revenue one will make from a real estate investment, so keep that in mind when exploring properties.
Also, note that no investor should rush into buying without a thorough evaluation. Check the location and previous maintenance culture of the place. Ensure there are no major repairs that are sure to hurt your pocket.
An expert on rehabs and repairs, like our own Craig Bengtson, can help determine exactly what a property needs.
To make a profit from the property, the landlord must find tenants. After all, high vacancy rates for an extended period of time eats into profits. Unfortunately, there is always the possibility of renting to problematic residents. Tenants who do not pay rent on time or destroy property are a near-constant worry for landlords. They can lead to significant financial stress, not to mention the mental work of sending notices, following up, and, potentially, evicting problematic residents.
As a landlord, you’ll want to investigate a potential tenant’s credit score, and work history, and even consider contacting previous landlords to learn more about them.
Pro tip: Don’t just check in with their current landlord, as they may have reason to embellish the truth just to offload the problematic tenant. You’ll want to go further back in their rental history for a full picture.
For landlords with full-time jobs, screening tenants can be stressful. Hiring a professional property manager is a safer bet for landlords who want to avoid bad tenants. These companies have years of experience and comprehensive technology to help select the right tenants every time.
Cash flow is the total amount of money left over after factoring in expenses. Ideally, the money coming in is more than the money going out. If the reverse is the case, the owner suffers a negative cash flow.
Different factors can cause negative cash flow, but two of the common reasons are low rent charges and high vacancy rates. High maintenance costs and financing costs on loans can also play a part. To avoid spending more than you’re making, ensure rent rates are competitive and the property is attractive to tenants. This may include rehabilitation, renovations, or otherwise spiffing up the property.
Investments like stocks are easy to sell. In other words, if you need to liquidate them, it doesn’t take much time or energy. This is not always true for real estate investments.
When weighing the risk, you’ll also want to consider liquidity. An investor should always check available market exits, as this information will be critical if or when it comes time to sell the property. Knowing possible exits can help prevent selling below the market price, or at a loss. When you need cash on hand immediately, you may need to settle for a quick sale, which can often result in a reduced rate.
There isn’t much you can do to diminish this risk, though you can apply for a home equity loan if you own residential property.
Depending on the market, vacancy rates can be highly variable. In other words, there are often periods when vacancy rates are relatively high, and others when they remain low. The trick is avoiding longer durations of high vacancy rates, as they result in negative cash flow for the investor.
To prevent high vacancy rates, try the following:
Never underestimate the cost of repairs and maintenance! Any investor looking to buy a property should invest in a property inspection. Always use a professional home inspector (ideally one that’s familiar with investment properties) to lessen this real estate investment risk.
A professional inspector knows where to look for any costly hidden problems. After all, structural repairs like foundations can cost a small fortune. For a single-family home, it can be as much as $12,000. These kinds of issues can quickly become nightmares for the owner.
Unfortunately, there is always a degree of risk when it comes to investing, real estate included. As significant as the returns can be, so can the losses. As an investor, you’ll want to be prepared for anything.
Luckily, a professional property manager and investor-friendly agent can help you mitigate the risks. Ready to take the plunge? You don’t have to go it alone. Contact us today to start your real estate investing journey with us!
Taylor Streitmatter is Evernest’s Director of Brokerage. His diverse expertise includes sales, operations, and brokerage management.
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