According to Gallup’s Economy and Personal Finance research in 2023, most people consider real estate the best long-term investment. However, like other investments, real estate carries several risks that can lead to massive financial losses.
So, before investing in real estate, it is important to understand the risks involved. This article lists seven risks you should know about. Read on to learn more.
1. Unpredictable Property Market
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Before 2008, many Americans believed that the property market only moved upward. However, their assumption was proved wrong after the Great Recession, as the real estate market witnessed a massive downturn.
While property values tend to appreciate over time, the real estate market remains unpredictable due to various factors, including government policies, interest rates, demographics, and the state of a country’s economy. In other words, the property investment does not always guarantee positive returns.
2. Selecting a Bad Location
When looking to invest in real estate, the top priority should be identifying a suitable property location. You are likely to generate good returns if you buy a house in a desirable neighborhood. That’s because properties built in good locations command high rental rates and appreciate in value over time.
3. Negative Cash Flows
When expenses associated with managing a real estate investment are higher than the generated revenue, it leads to negative cash flow. In such a scenario, an investor might be forced to draw funds from other sources to cover the costs.
But what leads to negative cash flows? The common drivers include costly property maintenance, high vacancy rates, and landlords’ failure to charge sufficient rent.
To minimize the risk of having negative cash flows, we advise making realistic calculations of the expected revenue and expenses. Also, ensure that the property you want to buy is in the right neighborhood.
4. High Vacancy Rates
As a real estate investor, you generate income by charging rent. That means if your property is not fully occupied, you risk losing money. Here are various measures you need to take to reduce the vacancy risk:
- Charge rental rates that are within the location’s market range.
- Conduct marketing campaigns for your property to increase its visibility among potential tenants.
- Ensure your property is well-maintained and clean.
- Offer rewards and incentives to retain your tenants.
- Work with a real estate professional to help you list your property and advertise it.
5. Problematic Tenants
While reducing the vacancy rate should be your priority, you do not want your property to be occupied by problematic tenants. Such tenants usually cause the following problems:
- Trash your property.
- Ignore their responsibilities as tenants.
- They fail to pay rent, thus leading to a costly and lengthy eviction process.
To avoid hosting problematic tenants, adopting a proper tenant screening process is advisable. You can check each potential tenant’s criminal background and contact their previous landlord to gather more information about them.
Furthermore, confirm if the tenant has a steady salary to pay their rent comfortably. You can do so by checking their work history.
6. Hidden Property Problems
Before buying a property, you should conduct a survey to identify any areas that need repairs so that you can negotiate a fair price with the seller. Failing to do this could cause you to buy the property at a higher price than its fair market value.
Also, do not survey the property by yourself. Instead, we recommend hiring a professional surveyor to inspect the property thoroughly.
7. Absence of Liquidity
It is easy to cash out your stocks due to deep liquidity in the financial markets. However, converting your real estate investment to cash is difficult due to insufficient liquidity. Finding the right buyer can take weeks or even months. Therefore, if you want to raise money urgently, selling your property might not be a good idea.
Conclusion
Over the years, real estate has been touted as the best investment to earn passive income in the long term. However, before jumping into real estate investment, because everyone is doing it, consider all the associated risks to determine if buying property matches your financial goals.