When investing in Real Estate, there are risks of real estate investing involved and you need to be aware of risks associated with the business. Many folks only hear about the success stories in real estate and never pay attention to the other side of the coin. On television, they make investing in real estate look not only easy but also super fun, just remember it’s still television and while it can definitely be fun, there are many challenges that come with investing. It is important to be aware of the risks associated so you can adequately prepare for and manage your risk.
Unfortunately, investing in real estate is not a risk free endeavor, in fact there are many risks associated with real estate. With that being known, there is much to be gained from real estate investing as well and in my esteemed opinion real estate investing is well worth the risk. The key to any business is being able to identify your risk, so you can prepare and manage for that risk. Below are some of the most common risks associated with real estate investing. Make sure to study the risks below before deciding whether real estate investing is the right path for you.
10 Risks of Real Estate Investing
- Negative cash flow – Is a Situation where the cash outflows during a period are higher than the cash inflows during the same period.If your investment fails to generate positive cash flow from the get go and you’re hoping for appreciation without a true plan to increase cash flow, you have failed to manage risk.
- Tenants – Finding quality tenants can be quite difficult, many novice investors rent to the first folks that fill out an application – don’t make this mistake as your property will soon be run down. Make sure to run background checks on interested renters and don’t be afraid to evict someone when they get behind on rents. I treat my tenants as I would want to be treated and I expect the same from them
- No appreciation – Some folks will buy property with the speculation that the property value will increase, because real estate always goes up in value, right? While investing based on speculation can work, it’s not recommended for many of your deals as the risk is too great. Make sure you do your due diligence on city/s you are investing your monies, speak to other professionals, read your town’s business journal etc.
- Repairs – Always estimate repair costs when contemplating buying a property. Make sure to estimate higher numbers than expected as you always want to prepare for worst case scenario. I estimate approximately 8% of my monthly rents to go towards repairs, this may be high but I would rather be conservative when estimating costs.
- Employment loss in area – Make sure you know your area well, don’t invest in towns with one or two major employers as the risk will be much too great. Try to invest your money in growing areas or towns that can sustain a few employers leaving town.
- Underestimate management required – Don’t try to manage properties on your own, find a reputable management company and have them take care of the property – you’ll be glad you did. You can expect to pay 8 to 10% of your monthly rents to a management company, your peace of mind is well worth that percentage
- No exit strategy – when buying a property, make sure to have multiple exit strategies at your disposal. Only having one is not sufficient. When buying a property, you should have at least 3 exit strategies outlined in your order of preference.
- Bought at peak of market – Be aware of the market you are buying in and know that if you are buying in a hot market that times may not always be so great. Remember, that in order to make money in this business, you must buy at a discount as you always make your money on the buy and not when you sell.
- Buying property without an inspection – Many investors fail to have a proper inspection and find out when it is too late that there are serious structural problems with the property. These things cost money to repair and cut into profits. The thing is that once you find out something is wrong with the property you are honor bound to either reveal the problem to potential buyers or fix the problems before selling the house. In the case of a flip, many major problems will undo the work that has already been done. I am not telling you to always have an inspector look at your properties as you will find many more deals being properties in As Is condition but make sure that you know what you are buying and always have another set of eyes to look at property before pulling the trigger on a deal.
- Time Constraints – Real Estate investing can require a significant amount of your time, especially when you are dealing with distressed properties. Other types of investments require you to be available during business hours. If your regular job demands most of your time, you might find it difficult to make time to invest in real estate. Understand the time involved with the various types of real estate investments so you can plan your schedule around your investing.
There are obviously many risks associated with this business but anything worthwhile usually comes with its fair share of risk. Real estate investing is one of the most lucrative businesses out there, but if you go into this business blind you are asking for trouble. Investing in real estate can make you a very rich person, however you need to make sure you are aware of the risks. If you manage risk in this business, you have the opportunity to make quite a bit of money. Do your homework and be ready for challenges, it’s not easy but it’s well worth the effort.
My purpose in writing this article was to make folks aware of the risks of real estate investing. Once an investor is aware of the risks, they will be much more successful. I hope that you will learn from my mistakes and be ready for all the challenges that lie ahead. I have no doubt that if you have a strong desire, a positive mindset and are aware of the challenges that you will have great success as a real estate investor!
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