How to Avoid the Inherent Risks of Real Estate Investment

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If you mind these risks beforehand, then you can mitigate most of the risks involved in real estate investment.

All investment ventures carry some risk that can become problematic for you in achieve your investment goals. It would be better if you knew how to evaluate and plan to avoid any investment risks before making an investment.

These risks are real and impossible to completely mitigate. The best you can do is get comfortable with the risks of investment depending upon your financial stability. Other factors include age, experiences, and individual circumstances.

For instance, the risk perception of investors close to retirement and the ones who just started can differ greatly. Young investors tend to take more risks and are highly likely to invest in properties that that are a fixer-upper before they can bring in capital.

Depending upon the type of investment property, there are four different types of inherent risks associated with real estate investment. These risks along with tips on how to avoid them are given below:

  • Vacancy

The risk of vacancy is associated with both rental and buy-to-hold properties. When a property you invested in for long-term rental purpose such as a flat for sale is vacant for an extended period of time. Or when a property you purchase to hold for sometime while its value appreciates in a good location such as Etihad Town, requires maintenance and security expenses to be paid from your pocket.

Then you can suffer loses of huge amounts. Other reasons that can cause these issues are the lack of demand for rental as well as maintenance costs for on-hold properties during vacancy.

These are huge risks, but can be mitigated by performing due diligence and strong research before investing. It will allow you to find out the reasons why you have to bear the vacancies and remedies them.

If you are facing problem with troubling tenets then you need to be prepared for that too. The best practice is to be patient and always keep some savings to cover any vacancy period. It would also be prudent to have a plan in place to find more suitable tenants.

  • Inability to liquidate

In real estate investment, investors need to be sure that they can easily liquidate a property whenever the need arises. In most of the cases, liquidation is required when you as an investor need to get your hands on some cash. Therein lays the problem with real estate investment.

Not all properties are easily liquidated, no matter how urgent your need is. Sometimes investors even have to suffer heavy losses to offload the property and get some cash. In order to avoid this type of problem, an investor has to think long-term and what is the right type of property they should be investing in.

Any investment should be made with the understanding that the property you are investing in can be easily liquidated whenever you want. Long-term hold properties are a great option in this regard especially for the people who did not have a good run with the property investment business in the past.

  • Property Damages

Property damage is among the top risk for real estate investment. No matter how careful you are you still have to face damages from time to time and bear the cost of repairs. It would be in your own interest to not invest in property that present an obvious vulnerability to certain damages.

When these damages happen, you have to cover them from your own pocket and your profit margins go down significantly. Some common risks to property include fire, robbery and damages caused by the tenants.

Fortunately, it is relatively easy to avoid these damages and protect your property from them by getting an insurance policy for all the risks associated with your investment in real estate. This is just in case, however, in most cases the investors do not even have to claim home or landlord insurances.

  • Debt Management

Debt management is among the most serious concerns of real estate investment. It refers to the amount that you pay for the property, being higher than its actual value as a whole. This value of the property is also called equity. So the debt to equity ratio is decided by how much you had to borrow to purchase that property. It is advised that you put as much of a difference between them as possible.

Meaning, you should not use more than 50% of the money to purchase the property. This will significantly lower your risk. Borrowing money solves most of your problems on the surface which is why people are attracted toward it.

However, spending most of that amount simply on the purchase can cause losses in a long run. It would be in your best interest to also consider the interest rate of the amount borrowed to purchase a property. Choosing the fixed rate option is always the best solution to eliminate most of the risks.

If you mind these risks beforehand, then you can mitigate most of the risks involved in real estate investment.