Real estate investment. Phenomenal! But…
Yes, everyone gloats on and on about the manifold benefits of real estate. Who’s talking about the risks and how to manage them? We are!
There pretty much isn’t any venture in life that you can undertake without risks, and real estate investment is no different. While it’s true that it is a relatively safe investment vehicle as opposed to other type of stock-based asset investment, there are snags. The fact that we buy physical assets in real estate gives many investors a level of comfort. Yet there are many risks involved in commercial real estate investing that have to be considered in conjunction with the expected value of the investment. Having frames of reference for investors to quantify risk helps ensure that the investment matches their needs, goals and tolerance.
There is general market risk, as all markets have ups and downs tied to the economy, interest rates, inflation or other market trends. Investors can’t eliminate market shocks, but they can hedge their bets against booms and busts with a robust strategy based on general market conditions.
Asset level risks are shared by every investment in an asset class. In real estate investing, there’s always demand for apartments in good and bad economies, so multifamily real estate type properties are considered low-risk and therefore often yields lower returns. Office buildings are less sensitive to consumer demand than shopping malls, while hotels, with their short, seasonal stays and reliance on business and tourism travel, pose far more risk than either apartments or office.
Then there is auxiliary cost risk. As demand for space in the market drives lease rates higher in older properties, it’s only a matter of time before those lease rates justify new construction and increase supply risk. What if a new building makes your investment property obsolete because there’s a better facility with comparable rents? It may not be possible for an investor to raise rents, or even attain decent occupancy rates.
How then do you best mitigate the risks that could apply to your real estate investment?
An Apparent Strategy is to Buy Value
The research time and effort to locate a property priced below market is usually well worth it. Starting with equity infusion just puts you that far ahead and reduces risk if market rents decrease or other misfortune occurs. So, enlist the help of real estate experts, and be absolutely certain that these ones who are up to date when it comes to market trends, and economical impact are helping you invest in property that will bring the most rewards not just now, but in the long term, with cushioned effect against future market upheavals. A real estate investment that can effortlessly sell itself in any market condition.
Look for the Smoking, Steamy Areas of the Future
Locating the area that’s about to be “the place” can be quite profitable. Identifying a neighbourhood that’s on the front end of growth and rehabilitation puts you on the front end of appreciation in value as well, while factoring in where current and future demand for real estate is headed. Provide what is direly required in the market, and not just a provision of your exotic ideals. For instance, research indicates that younger home buyers and renters alike want to live closer to city centers.
Look for a Property that You Can Improve Profitably
Increasing the value of a property via improvements increases equity and results in greater profits upon liquidation of the asset. Should interest rates decrease, the increased value can also be used to finance other investments or decrease debt service. The right improvement decisions can also attract better tenants and justify higher rents. The ROI on the money invested in the improvements can be attractive.
Look for Below-Market Rents when Purchasing
If you can locate a property with a significant percentage of rents that are below the going market rates, just getting the rents up to market standards will result in less risk in your investment due to better cash flows.
The ability to do economical remodel or upgrades to increase rents is also a good indicator for the purchase of a property. Often, landlords will become tired of marketing and they will settle for acceptable rents, even if they are below current market rates.
True, real estate investment is a delightful investment platform with the most minimal heartaches and risks if done right. However real estate investors should inquire and carry out their due diligence, be informed of even the slightest risks involved in their investments, and receive straight answers to be more confident in their investing decisions. Be wary of any investment opportunities that don’t make all risks involved crystal clear.