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Zhi Finance » Common risks involved in real estate investment

Common risks involved in real estate investment

While many millionaires will agree that they have made their wealth in real estate, honest people will also tell you that they may have lost some of their wealth in real estate. It is a risky business and every property purchased does not always turn out to be a successful investment. There are many risks associated with real estate investing, and if you don’t take the time to study them carefully and work to avoid them when planning your real estate investing strategy, you will go into the battle unprepared.

Unfortunately, there are few one-size-fits-all risks in real estate investing because each type of investment is inherently different. This means that each type of real estate investment involves a new set of risks. Below you’ll find a brief overview of the different styles of investing and the common risks involved in each style.

Rental properties

This type of investment offers a number of unique risks, some of which are also present when investing in rent-to-own or rent-to-own properties. First and foremost is the risk of not being able to make a profit. If the property in question does not realize enough monthly income to cover the costs of operating the property, then it is not a solid investment.

Other risks include the risk of getting bad tenants. This is especially difficult for first-time investors. Bad tenants are costly and in some cases destructive (which leads to greater expenses). Vacancy is another risk with rental properties. These properties are simply spending money while they are vacant, rather than earning money as they were. A short turnaround period is in your best interest, as is a long-term tenant.

“Hype” properties

For many “hands-on” investors, this is one of the most enjoyable types of property investment. It allows the investor to roll up their sleeves and take an active role in creating a masterpiece that will eventually bring in a huge income (or at least that’s the hope). It is also one of the riskier investments, especially 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 a project. First and foremost, the biggest risk is overpaying for the property. Other risks include underestimating the cost of repairs, overestimating the investor’s own ability to do the work, spending too much time, experiencing a downturn in the housing market, making bad judgments about the neighborhood, becoming overly ambitious, and becoming greedy. Sometimes it’s better to walk away with a smaller profit than to stick around and end up losing money.

Personal Residence

Remember, your personal residence is essentially an investment. Its purpose is that your home will increase in value over time and that the equity in your home will continue to grow as you get older. There are also risks associated with this type of transaction. Buying a home in a “marginal” area or one that shows no visible signs of growth is one of the biggest risks. This puts your home in a position to lose rather than gain value. This can make your home a liability rather than the investment it was intended to be. Other risks involve getting involved in a loan situation that has absolutely no benefit (such as an adjustable rate mortgage or an unreasonable balloon payment).

Perhaps the biggest risk when purchasing a personal residence as an investment is not having a proper inspection to rule out potentially expensive or even dangerous problems within the home you are purchasing for you and your family. Toxic mold is an easy problem to think of, and most proper home inspections will rule it out almost immediately. Other problems include structural issues that are costly to repair and dangerous if left in disrepair. These risks should be taken into account before making an offer on any property.

Real estate is an attainable way for those seeking to make a substantial profit in the short term. However, it is in your best interest to be aware of the risks involved and to take prudent measures to minimize those risks. Taking these steps now may cost more money on the front end, but in many cases, the rewards of doing so far outweigh the expenses.