With the recent stock market volatility, the thought of real estate investment properties may sound appealing to investors. While a good many millionaires will agree that their fortunes were made in real estate, the honest ones will also tell you that they’ve probably lost a few fortunes in real estate along the way.
Real estate investment properties can be risky, and every property purchased doesn’t always pan out to be a success. There are many risks involved in real estate investing and you would be going into battle unprepared if you didn’t take a moment to carefully study these risks and work to avoid them when planning your property investment strategy.
Each type of investing has inherently different risks. This means If you are considering different types of real estate investments, each will involve a new set of risks.
Investments can be made in various types of real estate.
- Residential Real Estate – This encompasses single-family, multi-family, apartments, and vacation homes. Residential properties can be rented to tenants or sold to homeowners.
- Commercial Real Estate – These properties include business or office spaces. Multi-family units can be considered commercial property depending on the number of units within the building.
- Raw Land – Vacant, undeveloped properties with no improvements that require little to no maintenance would be raw land. However, new construction development can be possible with the right properties.
You can also invest in non-physical real estate investments such as a Real Estate Investment Trust (REIT) or crowdfunding platforms. These are share-based investments where you own a portion of an investment portfolio.
We are going to look at residential real estate as it is one of the easier types to turn a consistent profit. Let’s look at several ways to invest and what risks are involved.
This type of investing offers some risks that are unique and some that are also risks when investing in properties that are lease-to-own or rent-to-own as well.
- 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.
- The potential of having a bad tenant. A bad tenant can be costly and, in some cases, destructive. Costs of collecting back rent, evictions, and repairs can add up.
- Having a vacant property can also cost money, depending on your costs to carry the property. Ideally, you will have short turnovers and long-term tenants.
This is one of the most enjoyable types of real estate investment properties 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.
- One of the most significant risks is paying too much for the property.
- Underestimating the cost of repairs can eat into any profit.
- Overestimating how much work you can do yourself.
- Taking too much time to complete the project.
- Making a wrong judgment of neighborhoods that can affect resale.
- Over-improving a property can affect your profit margin.
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.
- Not researching the area well and choosing a home in an area that is not showing obvious signs of growth.
- Using less than desirable mortgage financing options such as adjustable rate mortgages, balloon payments, or maximizing home equity loans.
- Failing to get a proper home inspection that can rule out potentially costly and even dangerous problems. Many of these problems must be remedied quickly.
Even during a real estate market slowdown, stagnation, or depression, real estate investments can make profits. So let’s look at some tips real estate investors use in building their portfolio strategy.
Research The Curve
The concept of a property market cycle is not a myth; it’s a fact. So first, check the recent historical price data for properties in the area you’re considering purchasing and determine the current market’s overall feel for prices. For example, are prices rising or falling, or have they reached a peak? Next, you need to know where the property market cycle curve is in your preferred investment area.
Get Ahead Of The Curve
As a basic rule of thumb, professional real estate property investors seek to buy ahead of the curve. If a market is rising, they will try and target up-and-coming areas, areas that are close to locations that have peaked, and areas close to locations experiencing redevelopment or investment. These areas will most likely become the next big thing, and those who buy in before the trend will make the most gains. As a market is stagnating or falling, many successful investors target areas that enjoyed the best levels of growth, yields, and profits very early on in the previous cycle because these areas will most likely be the first areas to become profitable as the cycle begins turning towards positive once more.
Know Your Market
Why are you buying the property? Are you buying to lease to young executives, purchasing for renovation to resell to a family market, or purchasing real estate for short-term/vacation rental? Think about your market before you make a purchase. Know what they look for in a property and ensure that is what you will be offering them.
Set a budget that will realistically allow you to purchase what you’re looking for and profit from that purchase through capital gains or rental yield.
Research the fees, charges, and all expenses you will incur when you buy your property. Cost may differ depending on the area. In addition, each municipality may have different requirements and fees. Know how much you will have to incur and factor this into your budget to avoid any nasty surprises and ensure your investment can become profitable.
Capital Growth Potential
What factors point to the potential profitability of your real estate property investment? Which economic or social indicators exist to suggest that property prices will increase? If you’re buying to lease, are there any indications that demand for rental accommodation will remain strong, increase or even decline? Think about what you want to achieve from your investment and then research and determine whether your expectations are realistic.
If you will incur substantial capital gains tax liability if you sell your property investment at a profit, will that render the investment profitless? You can learn more about capital gains tax in this recent blog post.
What levels of capital growth can you realistically gain on your property investment, or how much rental income can you generate? Work out these facts and then work backward toward your initial budget to determine your potential profit margins. You must always keep the bigger picture in mind to ensure that your real estate investment has good potential for profit.
Unless you’re buying property to flip it for resale, you should view real estate investment properties as a long-term investment. So take a long-term approach to your property portfolio and give your assets time to increase in value before cashing them in for profit.
Robert Kiyosaki, the author of Rich Dad, Poor Dad, said, “Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”
If you are considering a real estate investment, be sure to do your homework and understand your risks before you take the plunge. This article by Bankrate may help you sort out whether now is the right time for you to invest. A real estate professional who understands the local market can be a great resource to an investor.
Contact me, Charles D’Alessandro, your Brooklyn Real Estate Agent with Fillmore Real Estate, if you are considering a real estate investment. As a Brooklyn real estate agent with over 35 years of experience, I know the local area and market trends. Reach me by phone at (718) 253-9500 ext. 1901 or by email at [email protected].