When it comes to real estate investment, there are always risks and rewards involved. If you take higher risks you stand to make significant profit or suffer substantial loss. But whenever you are taking a big risk, you have to protect yourself and your investment. For this purpose, you have to define a limit for how much risk you should take.
There are 8 risks of real estate investment consider beforehand.
Real estate market has stand down corresponding to the economy, inflation rates, interest, and other trends. To protect your investment against general risk factors of market, the best way would be to diversify your portfolio. By strategizing for the event you can protect your investment against downfalls and gain benefits from booms. To navigate the market trends successfully you have to be aware of all the contributing factors.
Investors have to figure out which is more beneficial to invest in. For example whether the economy is good or bad the demand for properties such as apartments or flats for sale in Lahore remains constant. This makes luxury apartments for sale in Lahore a low risk investment. Especially when compared to investing in properties that are sensitive to fluctuations in consumer demand such as shopping malls, hotels, etc are dependent upon seasons and holiday occasions. This property classes force a far greater risk than all residential projects such as Union Developers Luxury Apartments.
Property Specific Risks
This type of risk is specific to individual properties where its value can suffer due to any number of reasons. Is there is a residential plot that you invest in but soon a gated community pop up nearby where the prices are a bit higher but the value of property is exceptional. Buyers are definitely going to be more interested in a gated community to reap the benefits it offers rather than a separate plot. So, these are the risks that are specific to a particular property and should be considered before making an investment.
Every investor has to evaluate a property for its ability to be liquidated fast. While in real estate business, you may come across certain properties that look like a great investment on paper. However, they can pose challenges when you try to get out of by selling them. In this situation, you may have to compromise on your profit margin which does not align with the goals of real estate investment business. So, while deciding whether to invest in a property or not, do consider the effort required to liquidate it as a prime contributing factor.
When you invest in a property and then use it as a revenue stream buy renting it out, you run a serious credit risk. Properties such as apartment complexes and mix-use buildings like malls are acceptable to credit risk. This happens whenever the revenue stream is disrupted due to construction, maintenance, or bankruptcy off the occupant where the tenant is not able to pay the rent any longer.
Tenant Migration Risk
When you lease a property, as the landlord you get to increase its rent annually. The older a property gets, the higher its rent. When the amount of rent reaches a specific limit for an order building, the tenants feel inclined to seek newer buildings with comparable rent. This can disrupt your building’s ability to attract and retain tenants. To mitigate this risk consider the property class, its sub market, and the location to evaluate how high the rent should go till it warrants some major upgrades or reconstruction.
Financial Structure Risks
Equity ranks last in the capital structure for the payout where its holder carries the highest risk. This type of risk also affects any joint property investment ventures. In such cases, where LLC is involved it is better to be aware of your rights and percentage holding. This dictates the amount of compensation paid to the LLC manager upon the sale of a property. However, for limited partners, the gross profit is divided for compensation paid to the same. This is where you have to be aware of the actual profits you will gain when a property is sold.
If you take out a lease on your investment, it becomes a risky venture. The more risky it gets, the higher you stand to demand returns on it. Leverage is considered a force multiplier and can move a long things as well as boosts returns with good performance. However, when loans are stretched that happens when returns are not what were expected, investor may face substantial losses. For a solution, your leverage must not exceed 75% and the focus should be on generating returns through real estate performance.
It bodes well for an investor to ask the right questing regarding risks beforehand and know all the risks involved in their decision of investing in a property. Keep in mind to steer clear of the properties that cannot clearly answer any questions related to the risks involved.