The worst thing that can come with an investment is the risk. Investing in real estate, unfortunately, is not an exception. But, there are ways to mitigate the risks of investing in real estate.
We all know that it is nearly impossible to prevent all risks associated with a business. If no external factors are there to contribute to risk, then I guess mother nature always has its ways with that particular matter. Truth be told, it is exactly what happens in most cases with real estate investments. However, even though we can’t completely avoid losing money, we surely can take some measures to reduce the risks of investing in real estate.
Here, in this article, we are going to address some of the major risks of investing in real estate. But, we are also going to present you with the best ways to mitigate them. So, here we go!
Risks of investing in real estate: Bad returns
Sure enough, you are investing for the sake of making money in real estate. Making money means that you get a good return on investment from an investment property. However, the worst thing is when you make a real estate investment and end up with bad returns. This means that you are losing money instead of making it. So, in order to mitigate the risks of a bad return on investment, you will need to perform an investment property analysis. This type of analysis ensures that you are buying an investment property that is profitable. Even though it does not mean that your property won’t be affected by other factors that might reduce your profit, you can still get an idea of the property’s potential.
The most important figures that the investment property analysis reveals are the rental income as well as the rental expenses you can expect. In some way, it is a great indicator of future profitability. Moreover, you can use this type of analysis to calculate the possibility of breaking even on an investment property. The lower the percentage, the better, of course.
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Risks of investing in real estate: Depreciation
One of the reasons we invest in real estate is appreciation. Real estate investors buy a property and hope it will eventually rise in value over time. But, what happens when a property depreciates instead of appreciating? Obviously, it is a loss.
To mitigate the risks of depreciation, you want to study the location. In other terms, perform the real estate market analysis (comparative market analysis). First of all, it will analyze the appreciation rate in a certain area based on historical data. It will most certainly help you find places where you can rest assured that your property is gaining value over time instead of dropping value.
Second, it will help you get an idea of how much to expect in rental income based on a comparison between your property against other similar investment properties around that same location. We call these properties real estate comps. They serve as the grounds that back up what you charge for rent.
Mitigate risks by finding investment properties the right way: How to Find Investment Properties with Heatmap Analysis
Risks of investing in real estate: Vacancies
One of the risks of investing in real estate is struggling to find tenants. This causes a negative cash flow instead of a positive cash flow considering the fact that a property is a liability unless you manage to make it work for you. So, at this point, we have two solutions for you. First, make sure you do proper marketing. Of course, for those who plan on hiring a property manager, it won’t be a problem. Property managers are real estate experts and know how to deal with a rental property and make it more appealing to tenants. Thus, it might be a problem for those who are managing the property on their own. Coming up with good marketing strategies would be the best solution for that. So, make sure you find out what marketing strategy works best in your location.
Second, there is the problem of paying your bills when you still can’t find tenants. This could be easily solved if you have saved money prior to buying an investment property. Regardless of your rental strategy, it is not always easy to find tenants right away. So, you want to have some cash available until your property starts to generate some positive cash flow.
As a matter of fact, this is one of the reasons that you should study the real estate market. In some areas, the rental supply is high which leads to low rental demand. In other places, the rental demand is high due to the lack of rental supply. Therefore, it is always best to invest in places with the second scenario to make sure you won’t struggle with finding tenants. I hope you see the importance of the real estate market analysis for mitigating the risks of investing in real estate associated with vacancies.
Risks of investing in real estate: Bad tenants
Sometimes, the risks of investing in real estate have nothing to do with the profitability of the property. In many cases, it is the bad tenants. I guess that is the nightmare for every landlord out there. Instead of having the cash flow for themselves, they end up paying for damages these tenants cause. This eventually leads to negative cash flow. To reduce the risks of bad tenants, there are two ways you could go with: 1) You perform tenant screening prior to letting them into your rental property, and 2) You get a good insurance policy that will cover any possible damages your tenants cause.
Risks of investing in real estate: Lack of knowledge
Well, all of the above are potential risks of investing in real estate. However, the main cause of these potential risks is the lack of knowledge. We all know that when you do something, you should know at least the basics. You really need to know where you are going, especially if it’s real estate investing. So, to mitigate this major risk, Mashvisor has your back. As the real estate experts we are, we have put together an amazing blog from which you can learn about all aspects of real estate investments, especially the things we have mentioned above. So, click here to surf our blog and start your learning experience with us right now!