Like any other investment, real estate poses its own set of challenges and risks. Understanding what those risks are is an important part of making smart investment decisions in real estate. By taking the time to educate yourself and learn from others, it is possible to avoid many of the mistakes and risks that are commonly associated with real estate investing.

Real Estate Market Risk

What happens when stocks drop in price? Everybody panics. In real estate, the hit towards value occurs very slowly and takes time to be felt. Also depending on which asset class you’re in, different real estate gets impacted in different ways. Usually, luxury market real estate gets hit the hardest when the market goes down. However, nobody is really always safe from this as these are uncontrollable forces. That said, you can limit your risk by investing smartly.

Tenants

Another common risk most investors face is having bad tenants. If tenants aren’t paying but you have to foot the monthly mortgage and bills, then there is a major problem. If you do not interview tenants properly, then you risk inviting in problems that will impact you financially and mentally. Evicting a tenant is a drawn out process. You can avoid this entirely by taking the time to place the proper tenant into your unit.

Proper Protection

Like any investment, real estate is an asset, and people who come after you may want to go after your assets. This is a big risk if you are in a tricky position. The best forms of protection are forming limited liability companies for your real estate or owning umbrella insurance coverage. Although never guaranteed, these two forms of protection can help you in what otherwise may be a devastating situation. However, you should consult with your lawyer and accountant to see which option makes the most sense to you.

Inexperienced Professionals

Who you work with oftentimes determines how successful you are in real estate. However, if you are brand new to the industry and have yet to build up a solid team, then you must be extra vigilant with whom you decide to work. Your team should consist of a real estate agent, mortgage broker, lawyer, and accountant. All who should also have your best interest in mind. Take your time interviewing and selecting people for your team. The wrong person in any of these positions can be extremely detrimental to your overall business. Choose the right people.

There are many risks when it comes to investing in real estate. However, these risks can be avoided through proper education and learning from others. With the help of our coaches at Real Success you can offset your losses by letting us guiding you in the right direction. Real estate is a forgiving investment vehicle but new investors should tread lightly when diving in. Take your time learning and only invest when you feel that you have everything you need to get started. Always consult with an expert before you make any decisions in real estate.

Rental Properties

First and foremost is the risk of failing to make a profit. If the property in question cannot achieve an adequate monthly income to cover the expenses of operating the property then it is not a solid investment.

Other risks include the risk of getting bad tenants. This is particularly hard on first-time investors. Bad tenants are costly and in some cases destructive (which leads to even greater expense). Vacancies are another risk for rental properties. These properties are only costing money as they sit empty rather than earning money as they were intended.

 “Flipped” Properties

This is one of the most enjoyable types of property investments for many ‘hands-on’ investors. This allows the investor to roll up his or her sleeves and take an active role in creating the masterpiece that will eventually bring in serious revenue (at least that is the hope). This is also one of the riskier investments, particularly when trying to turn a profit in what is known as a buyer’s market.

The risks are simple but often overlooked and they can have a significant impact on the overall success or failure of the project. The biggest risk in flipping is paying too much for the property. Other risks include underestimating the costs of repairs, overestimating the ability to do the work yourself, taking  too long to complete repairs and remodels, experiencing a downturn in the housing market, misjudging the neighborhood, and wrong pricing. Sometimes it’s better to walk away with a lesser profit than to end up losing money by holding out.

Personal Residence

Keep in mind that your personal home is essentially an investment. The intention is that your home will gain in value over time and that equity in your home will build as you age. There are risks involved in this transaction as well. Buying a home that is in a ‘borderline’ area or one that is not showing obvious signs of growth is one of the biggest risks. This puts your home in the position to lose rather than gain value. This can make your home a burden rather than the investment it was intended to be. Other risks entail becoming involved in a loan situation that is not at all beneficial (adjustable-rate mortgage or unreasonable balloon payment) to your goal.

Perhaps the biggest risk of all is failing to get a proper inspection that could rule out potentially costly and even dangerous repairs within the home. Toxic mold is one problem that comes easily to mind that most proper home inspections would almost immediately rule out. Others include structural problems that are costly to repair and dangerous to leave in disrepair. Each of these risks should be considered before an offer is made on any property.

For those seeking to turn impressive profits in short order, real estate is one way in which this can be accomplished. It is in your best interest, however, to be aware of the risks that are involved and take careful steps to minimize those risks. Taking these steps now may cost a little more on the front end but in many cases the pay off for doing so well outweigh the expenses.