Investing, especially in real estate, involves risks and rewards. In general, the higher the risks you take, the greater the potential for significant gains. Conversely, it also means the higher the risks, the greater the potential for losses.
If you are considering buying or investing in real estate, there are several things to watch for to avoid losses. Here are the three most important real estate investment risks:
Market
The real estate market is highly unpredictable. And while there are forecasts, the market could easily tumble, causing your investments to depreciate.
There are several factors affecting market conditions, including supply and demand, the economy, demographics, current interest rates, changes in government policies, and unforeseen national or international events.
One way of lowering the risk of your property depreciating is by doing careful research about the market, monitoring your real estate holdings, and adjusting your entry or exit strategies.
Location
Investing in a well-maintained property would not give you significant returns if it was located in a dangerous neighborhood. Having property in a good location means there is a higher demand for rental properties, a better tenant pool and rental rates, and a greater potential for appreciation. As such, location should be one of the first things you should consider when buying a property.
To ensure the area is a good investment, research crime rates in the neighborhood. You can also research if the area is newly developing or gentrifying.
Negative Cash Flow
Negative cash flow is one of the most common risks for real estate investors. A negative cash flow happens when your property payments, taxes, mortgage payments, and other expenses exceed the rental income. This means you're just losing money.
Negative cash flow occurs for several reasons, such as high vacancy rates, high maintenance costs, high financing costs on loans, low rent, or an ineffective rental strategy.
If a high vacancy is a problem, this can be mitigated by offering competitive rental rates, marketing your property on social media and other places where your target tenant might look for information, or listing the property with a reliable realty firm. If the unit has a tenant preparing to move out, we recommend looking for a replacement as soon as the current one gives you notice.
Overall, the best way to reduce the risk of a negative cash flow is to do proper research before investing and calculating your anticipated income and expenses.