There is no such thing as a free lunch and no investment is free from risk. Although Real Estate has historically proven to be very stable and profitable in the long-term, property investments are prone to risks that investors should be aware of. In this blog we cover 8 major real estate investment risks that can negatively impact your investment.

General Market Risk

All markets, including real estate, have ups and downs. Real estate prices can be affected by the economy, federal interest rate, inflation and other market factors. Investors can’t eliminate market shock or loss of confidence in real estate which can bring prices down.

However, you can hedge against sudden drop in real estate value by diversifying your portfolio with a mix of investments.

Location Risk

Real estate investment is all about location. When you are buying real estate for investment, experts will tell you that location should be the biggest factor in your decision. A property in the right location will be easy to find tenants for and appreciates in value faster.

Avoid properties that are in neighborhoods with higher crime rate or those that are away from work/study opportunities.

Cash Flow Risk

Cash flow determines the income you generate from the property against expenses incurred. Normally, your income should be higher than expenses. However, if your expenses become greater than the income you are generating, it poses a cash flow risk for your investment.

It is difficult to eliminate cash flow risk completely but it can be reduced with good planning and operating income calculations prior to investment.

Uncooperative Tenants

Bad tenants that delay on payments, damage the property and don’t follow rules can be a major headache and investment risk. Sometimes, a bad tenant is worse than having no tenant at all.

Screen your tenants carefully prior to signing a contract. Be transparent about your expectations and make sure that they understand your requirements. Evictions can be costly and time consuming, so apply a robust tenant screening process. Check their credit score and contact their previous landlord to get a clear idea.

Long Term Vacancy

Having a rental property is no guarantee of finding tenants. There are cases where landlords are unable to find tenants for months even when the rent is low and the property is well furnished.

Good property location is important here. Low crime rate, nearby work/study opportunities and access to public transport or parking spots are also important factors. Make sure you are charging a market competitive rent for your property to attract tenants. Also find out the vacancy rate and rental property demand in your market before buying anything. A high vacancy rate means you will have a difficult time finding tenants.

Liquidity Risk

Real estate investment is a long term game. You should be fully committed to investing funds for at least 5 to 10 years to earn a healthy return. However, cash emergencies can arise at any time and you may find yourself forced to sell off a property at a loss because you need the cash. This is an inherent liquidity risk in real estate.

You can minimize this risk by keeping real estate investments to 50% or less of your total savings. Invest the rest of your money into liquid assets that can be cashed out without any loss. The rate of return might be lower in such assets but you won’t have to sell off real estate when the situation calls for it.

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