As with everything in life, there is risk involved. When you invest capital into any project, you can lose or profit from it. However, the biggest risk a person can take is to do nothing and to run with it makes you feel alive. The way I have always looked upon risk is that If you win, you will be happy; if you lose, you will be wiser. There are ways to minimize risk and invest in safer options, and I firmly believe that real estate offers the best outcome for a positive return. I have found that investment equates to committing resources, whether it is time, emotions or money. The higher the return, the higher the risk. Let’s use a relationship as an example. You commit long term time, emotion and finance with the expectation of a positive return, whether that may be marriage, starting a family or companionship for life. But if the relationship breaks down after two years, you lose all that investment and get no return, except maybe for being a little wiser the next time.
Real estate investing is similar. You invest time, emotions and finance into finding the perfect property and sometimes it may not work out due to making silly mistakes or letting emotions rule your head. These are all-natural mistakes beginners in real estate make, just like real-life relationships. We all remember the frogs we had to kiss to meet our prince, and we soon realized that experience in life is a great teacher. It also gives a sense of reassurance that somebody is watching your back and available when you need to make a decision or require a second opinion. This is why I advise that when starting in real estate investment, it is wise to hire a dedicated real estate coach or mentor to guide you through the maze of property investment and advise on the right paths to take and the ones to avoid.
The most common risks I have found associated with real estate are;
1. The Market. We all know about property bubbles and their circular nature. The good thing about land and property is that only a finite amount is available. So while there will be fluctuations in the market due to recessions or other external factors, up to 50% in some cases, history has shown us that the property market property will always bounce back.
2. Location. Location is a big factor when it comes to real estate investment. Choosing the right size and neighbourhood, being close to transport links and facilities like schools and parks or choosing an urban or rural location are essential risk factors to consider when investing in real estate.
3. Negative Cash Flow. High vacancy rates can lead to negative cash flow. You pay more in mortgage repayments than the income you receive from the property. Other factors can lead to negative cash flow.
4. Tenants. Bad tenants can cause problems. However, statistically, only 2% of tenants will be problematic. Remember good performing tenants can become poor due to bad health, a relationship breakup or unemployment. Proper screening and references will weed out the bad ones, so do your homework or hire a realtor to do it for you.
5. Repairs and Maintenance. Not performing a professional inspection of a property for potential defects or wear and tear problems can add to the costs and reduce profits. Also, you can minimize the risk in this area by employing professional tradespeople to ensure that the repair is fixed correctly and will not reappear again, saving you time and money going forward.
6. Liquidity. Property may take some time to sell, depending on the health of the market and your circumstances. Therefore, lack of liquidity is a risk when investing in property.
The above six factors are the main risks to avoid when contemplating investing in real estate. If you are starting, I would strongly advise hiring the services of an experienced mentor or coach who can help save you money or directly connect you with reliable tradespeople and suppliers, sometimes even at a discounted rate. Thank you for reading my blog, and if you require any further information or help, please have no hesitation in contacting me.
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