All Real Estate Investments Risks And How To Avoid Them
What Real Estate Investment Risk Types Are There?
As one of the most profitable and hunt for businesses, real estate investing now breaks the records of commercial interest among progressive entrepreneurs. Investing in real estate means integrating into a trending financial culture that brings lavish profits in no time to those who take the right approach to its undulating and somewhat edgy processes.
Yes, even though real estate investing is a lucky catch for sharp-witted business owners, this practice may get slightly challenging and cumbersome unless investors get familiar with the risks encompassing real property investing and how to deal with them.
First, let’s come to grips with the high risk investment definition: a high risk investment is an investment subject to long-term or short-term volatility.
That being said, let’s dissect what real estate risks may lurk you on your up-and-down journey to real estate investing! To your attention, types of risk you may face as a real estate investor!
Risk 1: Negative Cash Flow
As one of the types of investment risk, cash flow is the amount of profit that investors get after they pay off all expenses, taxes, and mortgage payments. Generating negative cash flow instead of positive flow means an investor’s expenses, mortgage payments, and taxes, are higher than than the rental income, which may lead investors to lose money.
When can you stumble on the risk of losing money? When an investor buys a property without a real estate market analysis, they can face severe negative cash flow. How to avoid this risk, then? By calculating your income and expenses before you buy a property, you can largely prevent negative cash flow and thus ensure that the property has a favorable location and can bring you positive cash flow instead.
Thus, one of the rules of the real estate investing education is the following: to prevent negative cash flow, it’s crucial to be accurate and attentive since the expenses in the real estate eventually add up, exposing you to a number of risks. To make sure you calculate your expenses properly, it’s recommended to utilize Mashvisor’s rental property calculator. This is how proper real estate risk management works.
Risk 2: Unpredictability of Real Estate
Another real estate risk is its unpredictability. Despite the rapid growth of the real estate market over the last couple of years, there’s still some risk that the industry may go through substantial mishaps even seasoned investors may find hard to predict. The real estate market is highly volatile and unpredictable, especially in unstable economic conditions. The economy plays a significant role in the investment property value. Thus, you’re not guaranteed to make a profit when selling your investment property.
For instance, if you purchase an investment property when the demand is high, you may run the risk of selling your property for a price lower than the initial one, even though the property generates the profit through rental income. That being said, you should be aware of the volatile nature of the real estate business and understand the market economy, being able to predict the ups and downs of the market.
Risk 3: Lack of Liquidity
This is one more real estate investment risk. What is liquidity? It’s the ability to access the money an investor has in their investments. Is real estate a liquid investment? Yes, it is. If a property is illiquid, an investor will have trouble converting them into cash. It’s pretty troublesome to sell a property, especially under pressure. Lack of liquidity makes investors hold their investments for longer and this is risky for the people who will need to get their cash ASAP.
Risk 4: Foreclosure
If you can’t make your mortgage payment timely for several months, your rental property will be put at the risk of foreclosure, one of the most hazardous risks of real estate investment, which is the process of losing your property to the bank. A foreclosure is the process that can largely harm your budget as well as diminish your chances of getting a bank loan in the future.
To eschew foreclosures, you need to ensure that you do the proper analysis of the real estate market before putting a 20% initial payment on your real estate investment. How to analyze real estate deals? Consult specialists from real estate management companies like DGY or do your own analysis based on your knowledge if you have some.
Now, it’s time to answer the question: which form of investment has the most amount of risk involved? And the answer is simple – mutual funds. We touched on this matter in this very passage for a reason – mutual funds are greatly exposed to foreclosures.
Risk 5: Depreciation
Depreciation is the opposite of appreciation. As a rule, real properties increase in value over time. But this tendency doesn’t apply to all real estate properties hence another risk of real estate investing – if you plough money in the property whose value will decrease in the future, you risk losing money. To prevent money loss, you need to conduct thorough research of the real estate market and scrutinize the economic growth of the market.
Risk 6: Hidden Property Problems
Investors often purchase properties with substantial structural problems, thus coming across the burden of making repairs and doing costly maintenance work. In order to avoid this risk, you need to examine the property to the bone before investing in it. Home appraisal is one of the good options to stick to when evaluating the condition of the property and is provided by home appraisers who will spot any tiny damage done to the reality.
Risk 7: Bad Tenants
Having tenants is a vital condition for growing rich with real estate investing. But not every tenant will ensure your financial well-being as a real estate investor. As experience suggests, there are destructive tenants who can make your investment deal deteriorate. What tenants can be classified as bad, then? A bad tenant is a tenant who harms the dwelling with both intentional and unintended actions as well as dodges their rental payment obligations. In this regard, the risk of getting such tenants is even more dangerous than the risk of having no tenants.
And having no tenants, in turn, means having no income. This means that you do need to have tenants and, most importantly, eradicate the perils of renting out your property to a bad tenant is develop the sustainable strategy for selecting tenants, or follow some proven tenant screening process.
Risk 8: Vacancy Risks
If you purchase an apartment, you’re not guaranteed that it will have total occupancy and quick income. High vacancy, a common occurrence in the real estate industry, poses a significant threat to investors’ rental income for it is likely to cause negative cash flow. Given that tenants are the main source of rental income, vacancy is a tremendous hazard for investors relying on income.
In order to eschew the high vacancy risks, you need to buy properties that are in good condition and have a favorable location. What locations are favored by tenants the most, then? What qualifies as a good location is a safe neighborhood where all basic, necessary facilities such as shops, malls, drug stores, transportation, schools, kindergartens, are in close proximity.
In a Nutshell
All profitable and eye-catching business ventures come with risks, don’t they? So does real estate investing – this trending practice long ago won the eager hearts of relentless entrepreneurs and does have its pitfalls, But, if approached correctly and professionally, investing in real properties will bring you mind-blowing profits and a useful experience engaging in the ever-growing, global culture of real property. Risk management in real estate investment is essential and, in this article, we provided you with the solid information on how to handle your investments so they are never exposed to any risk common for the industry.
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More about DGY
DGY is a real estate investment and property management company. Our experts have an impressive experience in turning businessmen into smart real estate investors. We collect limitless opportunities throughout the world’s best real estate markets and help our clients implement the best deals. We take care of all due diligence and customize documentation while your income grows. We also provide you with property management services so you can forget about the tiresome maintenance of several objects and entrust this process to professionals.
Investment advice and recommendations
DGY is an investment company that takes care of every client and helps them become successful investors. With the help of an investment experience and a well-thought plan, we will help you examine the market, choose a strategy specifically for you or your business, and calculate future costs to start making money with real estate investment.
In order to invest in real estate, you should consider how you will run your management in Ukraine. DGY will help you eliminate all possible pitfalls at an early stage as a personal project manager will be assigned to your case. They will assist you in choosing the project according to all required objectives.
DGY Investments takes care not only of purchasing property but also renovating an existing one. With the help of a thorough plan and estimating, we will thoroughly prepare a property for sale. Our professionals evaluate an investment property and create a strategy that includes the costs for renovation, possible taxes, fluctuations on the market, etc. Therefore, our clients are able to resell the renovated properties in Ukraine with more than 15-20% profit from the initial price.
Before our clients decide to deal with real estate investing, they consult with our experts concerning details such as the necessary documents needed to purchase a property and successfully run all the processes connected to it.
Therefore, if you are eager to invest in Ukraine, it’s essential to have all the paperwork done correctly, and that’s the moment when our team of experts takes care of this step. DGY Investments helps investors buy real estate property, manage the paperwork, start preparing relevant documents for purchasing realty in Ukraine, and close the deal successfully.
Real estate investment opportunities in Ukraine
When an investor decides to invest in real estate in Ukraine, the most affordable way to attain stable passive income is through buying residential real estate. Investors can expect to receive a regular monthly payment from their tenants at a fixed monthly amount, unaffected by inflation or other unforeseen circumstances. The amount of rental income will vary depending on the size, type of property and location. For example, buying an apartment in Ukraine’s capital Kyiv is beneficial to investors due to offering a large working population, central location and affordable prices. Hence, the minimum price of renting a decent one-bedroom apartment in Shevchenkivskyi District will be around $1000 per month in 2021, followed by Pecherskyi District with a cost of $850 per month. Besides, investing in real estate in Ukraine annually brings clever investors up to 15% of yield, attracting many business people every year.
Properties for investments in Ukraine
Ukraine has a giant sector for real estate investing. Businessmen who come there all over the world often choose between investing in residential and commercial properties. The main advantage of buying property in Ukraine is the affordability of prices on the houses and apartments. For instance, if you invest in real estate in a historical district, a luxurious apartment will cost you around $80k only.
How to invest in Ukrainian Real Estate
In order to invest in Ukrainian real estate, you should take into account a list of crucial factors. The first one is to choose what kind of realty you are going to invest in: residential or commercial. It is vital as it should comply with Ukrainian real estate law. The second tip is to identify the purpose of purchase in order to make a strategy for the property. For instance, you may purchase the property for your own use or buy it for lease. The next step is to calculate the taxes and what kinds of taxes are payable during the purchase, owning, or selling. Also, to invest in real estate properly, you should keep in mind currency control rules in Ukraine to sell a property and get a higher profit.