Real estate investing offers passive income and a way to diversify your portfolio. It appears glamorous, but it isn’t without risks. It’s not all gain though; there are different risks of investing in real estate depending on how you approach the market.
Regardless of your age, personal circumstances, or current financial situation, these real estate investment risks are universal, and you must keep an eye out to avoid falling into an unfortunate financial situation.
The real estate market is unpredictable. While there are forecasts on where the market is headed, nothing is set in stone. Many factors affect market conditions like economic forces of demand and supply, changes in government policies, and unforeseen national or international events.
Here are a few tips on how to minimize these risks:
- Diversify your property portfolio
- Invest across different locations
- Buy different property types (apartments, townhouses, units)
- Focus on different demographics
- Include budget variance
- Buy the property below the market price. It gives you a safety net if the market slumps due to external factors.
Not every property investment is flawless. Sometimes, there can be hidden structural problems such as mold or foundation damages. This can cost you even more because you’ll be handling unexpected maintenance and repairs.
To avoid this risk, only purchase from reliable developers with an impressive property portfolio. Alternatively, you can have the property evaluated by professional appraisers.
Maintain the property by conducting regular inspections and fixing minor issues before they turn into big hassles. By maintaining the integrity of the structure, you will ensure it is stable and robust.
Buying adequate building insurance will also minimize some of these risks. Ideally, you should have your insurance in place as soon as the contract is signed to ensure that you are adequately covered.
Alongside difficult tenants, you also have the risk of high vacancies. Having no tenants for an extended period is a problem, too, because you don’t have rental income to pay off your financial obligations. You can mitigate this risk by offering competitive rental rates, marketing your property via social media, or listing the property with a trustworthy realty expert.
Rental real estate can come with the risk of difficult tenants who don’t pay their rent on time or at all. Don’t accept all tenants that apply for the space; bad tenants are worse than having no tenants because they can consume your time and expenses. Hence, you need to do a comprehensive screening process with your applicants to ensure these situations don’t occur.
Whether you’re purchasing a house in the outskirts of Jersey or a property out of state, you should be aware of the risks that come with real estate investments. For most of these risks, the solution is to research as much as possible to get a scope of the market forecast. By knowing what to expect with your potential investment, you can make more confident decisions.