Real estate has been around for many years now, and no one can deny that investing in real estate is among the best ways of making money and building wealth. And this is mainly because house prices tend to rise over the long term. Besides that, purchasing, owning investment properties, and earning passive rental income come with many other benefits. However, it is essential to remember that just like stock market investing or any other type of investment, a few risks are associated with real estate investing.
Therefore, whether you are a new real estate investor or experienced, you should be aware of these risks, not to scare you away but to enlighten you on how to avoid them. That said, avoiding the following risks of investing in real estate will help you find the best rental property and get the best returns.
Location is a critical factor when it comes to real estate investing. It’s one of the reasons why real estate in Sydney is some of the most expensive in the world. Therefore, location can be a significant risk being the top factor to consider when purchasing any investment property. The fact that location determines the supply and demand might make you think that a particular location is your best choice for real estate investing because of lower prices. You might be surprised that sometimes such locations can have an overload of investment properties available but lack a good job market or a growing population.
Additionally, locations with relatively higher crime rates could expose any property investor to the risk of robbery and vandalism. And since location determines appreciation in real estate investing, low appreciation could mean a negative return on investment. Therefore, you can best avoid the risk of wrong locations by being extra careful when selecting an ideal location for real estate investing.
The Real Estate Market Unpredictability
Although the real estate market has been on an upward trend in the past few decades, there is no guarantee that this growth will continue. In real estate investing, the value of an investment property significantly depends on a country’s economy. Therefore, with the ever-changing economic conditions, there seems to be no guarantee that investors will continuously make profits when selling investment properties. Thus, the recommendation is always to be aware of such dynamics and understand and always stay updated with the real estate market economy and how it works. Forecasting any real estate market downturns by preparing ahead of time will also help you avoid this risk.
Negative Cash Flow
After paying off all taxes, mortgage payments, expenses, etc., all property investors expect to earn a profit in the form of a positive cash flow. But there is also the possibility of your real estate investment generating a negative cash flow meaning that taxes, mortgage payments, and expenses are higher than the rental income. The best way you can avoid this adverse cash flow risk is to accurately conduct a real estate market analysis before buying investment properties. How much will the rental income be? How much do you need to spend on the property? Is the rental property in a prime location that can yield a positive cash flow?
The Risk of Vacancy
Sometimes purchasing an investment property doesn’t automatically guarantee investors quick profits through 100 percent occupancy. It would be best if you understood that real estate investing also comes with the possibility of high vacancy, a considerable risk to your rental income because it can yield negative cash flow. Real estate investing depends on tenants as the sole source of rental income, making vacancy a considerable risk for real estate investors who rely on rental income to pay off their property taxes, insurance, mortgage, and other expenses. One of the solutions to the vacancy risk is purchasing investment properties in locations with high demand.
Although owning real estate properties is a relatively safe investment, you can never guarantee a profitable investment 100 percent. The above challenges are the most common real estate investing risks. Also, hidden structural issues, lack of liquidity, bad tenants, depreciation, and foreclosure are other risks worth considering in real estate investing.
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