5 Risks in Real Estate Investment & how to handle them.

Any type of investment can be risky business, and real estate is no exception. In fact, with an ever-fluctuating market and economy, the risks in real estate investment can seem enormous. However, there are ways to handle these uncertainties, and recognizing the risks before you make the leap and buy property is the first step. With this knowledge, you can anticipate potential setbacks and devise a plan for dealing with them before they even occur. Here are some of the risks you may encounter when investing in real estate, along with a few tips for managing them.

Negative Cash Flow

As an investor, you never want to find yourself in a position where you’re experiencing negative cash flow. If this happens, you could potentially lose a significant amount of money. However, with real estate investments, this is an inherent risk. There are a number of events that may occur that could result in a hit to your cash flow, such as unexpected repairs, tax hikes, a sudden shift in the economy, and many others. To combat this, it’s important to thoroughly crunch the numbers before you buy any property, factoring in all the expenses (current and potential) associated with it and comparing it to your profit projections.

Too Much Competition

Another possible scenario that could wreak havoc on your profits is a market inundated with investors. Let’s say you snag what you feel is the perfect investment property in a great neighborhood. Well, how many other investors have done the exact same thing? You need to know the answer to this question before you buy, otherwise you may find yourself in a position where supply far outweighs demand, resulting in a struggle to find tenants.

Bad Tenants

Speaking of tenants, they can pose a huge risk too. No doubt you’ve heard the horror stories of tenants trashing their rental homes and costing the owner thousands of dollars in repairs. This is definitely something to be concerned about, but taking small steps to vet prospective renters can help you avoid these situations. Running background credit checks and employment verifications can go a long way in helping you sort the good tenants from the bad.

Vacancies

“Vacancy” is a scary word for anyone investing in rental property, because it equals lost income, plain and simple. Unfortunately, the risk of vacancy is something you can’t avoid as an investor; however, you can manage it by planning for it. Start by applying a certain percentage of the time that you think the property may be vacant – for instance, one month per year – and budget it into your expenses. Doing this will help counter the lost income and eliminate the surprise factor for you. Also, take the time to plan a marketing strategy for your property to avoid vacancies. Who is your target market? How will you advertise the property? Having answers to these questions can help your rental stay tenanted.

Liquidity

Liquidity is a risk most investors are concerned about, and rightfully so. Getting stuck with an under-performing or profit-draining property is bad enough, but being unable to sell it when you want to can turn it into a veritable nightmare. To manage liquidity risk, it’s wise to invest in properties that you can afford to hang onto during hard times, such as economic downturns or job loss. You will also want to diversify your investments and assets; don’t sink all your money into one property. If it tanks, you could lose everything. Finally, be sure to have an exit strategy in place that includes how you’ll manage if the only way to sell the property is to take a loss.