3 major risks in real estate and possible types of problems you may face

Any investment activity is connected with certain risks because it’s impossible to predict everything. There are always unplanned situations, which can influence the amount and time of returns. Real estate investment is not an exception. If you decide to invest money in property in Ukraine, it’s important to know about all real estate investment risks and ways to avoid them.

Types of risks in investment

It’s difficult to be sure about all risks connected with real estate investments because they are highly dependent on the characteristics of the property and other issues connected with it. However, to let you understand the major problems, which can occur, we present the types of risk in investment:

• Property type. Various kinds of properties can possess a different number of risks. For example, we can consider the type of lease. If you have a single tenant for your property, he/she is the one to be responsible for it and you rather have than not have a regular cash flow. With more tenants, the risks increase but also your cash flow stabilizes. So, the risk to lose the entire income becomes higher with one tenant because if they vacate the property, it becomes 100% vacant. As a result, the landlord becomes responsible for all further expenses. That’s why it’s always recommended to observe the financial stability of a future tenant beforehand or buy a multi-tenant property.
• Investment structure. This type of risk is often unrecognized. This issue required several things to consider:

• Legal entity (it’s necessary to choose a suitable legal entity for risk management depending on the type of property investment)
• Capital (investments with plenty of available capital may be better equipped for unexpected property issues/downturns in market conditions). The source and availability of capital are to be considered to understand the investment opportunities
• Alignment of interest. Working with several investors, there’s a sponsor to control the key issues. You can have access to the experienced operators and other specialists but it’s recommended to find out the ways of compensation to the sponsors as well as their incentives.
• Market risk. It depends on the position of the property in the economic cycle. The latest consists of several phases, which are recovery, growth, peak, and recession. In spring 2020, we observed the economic recession, which influenced the property market. The situation dramatically changed in 2021 when the demand for real estate became growing. The tendency continues now. However, a deep analysis of a specific region is required before investing in property in Ukraine depending on location, property type, and other factors. Some types of real estate are still in the phase of recession. At the same time, there’re positive forecasts for the nearest future for all types of them (including the industrial sector). The residential property is the most popular now because people are looking for better opportunities and have different priorities compared to the period before Coviddemics.

Risks of real estate and how to avoid them

Now we’ll consider the most significant risks investors can face in Ukraine and describe the ways to avoid them:

• Negative cash flow. It’s a major and most frequent risk. Investors should know that their investments could be more than the returns. That’s why it’s required to carefully select the property, its type, and conditions. It should be a strong demand in the market. Thus, in Ukraine, the prices for accommodation to rent continue to grow (especially in the capital).

Besides, in 2020, the prices for 1 sq. m became lower, which made the purchase more available especially for investors. In Kyiv, the prices were about $3,000 per sq. m in the center and $1,350 in the outskirts. It’s much cheaper than, for example, in Bucharest or Riga. Besides, Ukraine moves to the EU, which additionally provides safety and stability.

• Lack of liquidity. With the current situation, it might be hard to sell your property, which makes it less liquid compared to other types of investment. However, the local real estate market is characterized by stability. Thus, with the stable demand for accommodation in Ukraine, there’s a low risk for real estate investment. The sector isn’t influenced by inflation and other economic changes. Besides, a positive tendency is expected to continue, so it’s a good idea to invest in residential property in Ukraine.
• Foreclosure. If the property is mortgaged, it will be necessary to pay for it every month. If you miss a few payments, there’re risks of foreclosure, which will lead to losses and problems with getting a loan in the future. In Ukraine, you will first have to pay fines for delinquency. After several months of non-payment, a bank will lawsuit you to either pay out all debts or sell the property. Be careful when analyzing your budget and choosing a suitable type of property to avoid this risk.

Conclusion

To prevent any real estate investment risk, it’s recommended to make a thorough research of the property market in a selected country and city. It’s also advisable to work with a real estate agency, which knows the local laws and other features of buying property.