Real Estate Investment Risks: With the average sales price of houses sold in the US at $307,800 and 760,000 homes sold this past May alone, investing in real estate can be a rewarding venture. However, with any exciting and potentially profitable venture comes several risks.
Learning to mitigate and manage risk in real estate investment is as important as identifying great opportunities in new and existing marketplaces. If you haven’t taken the time to think about the risk side of real estate investment, then read on.
We’ve provided you with the top five most common real estate investment risks to avoid.
1. Unpredictable Markets
Market risk is the number one risk that all new and existing investors take when buying real estate. Market changes will not only affect the future value of an investment but its future cash flow potential, too.
For example, there were 1.42 million homes for sale in America in 2020, a decrease of 10.7% compared to the previous year. Market risk will always fluctuate according to supply and demand and other general market cycle shifts.
2. Unforeseen Costs
Unforeseen costs, or physical asset risk, is the risk that occurs according to the physical condition of an investment property. Of course, the older the property, the more risk involved – usually. But, some new properties can suffer from hasty and lackluster construction.
These factors will take money out of your pocket for costly repairs and maintenance while your property is still on the market or used as a rental.
Always take a hard physical assessment of the property you are looking to purchase. In fact, have a professional property inspector create a full report of their findings if you have the time.
3. Potential Foreclosure (Real Estate Investment Risks)
Yet another potentially life-altering risk to add to the real estate investment pitfalls list – foreclosure. If you or another investor fails to pay the mortgage installments – well, I think you get the picture.
The real estate investment loan is then transferred to default status, and if payment is not made within an agreed-upon timeframe, it will be lost to the lender or bank.
One foreclosure can significantly affect your chances of receiving a loan for a future real estate investment purchase.
4. Changes in Tax
There is no doubt that any real estate owner will be facing several taxes. This may include capital gains, income, and property, for starters.
Different taxes mean a greater chance that one of those tax laws may change during your ownership period.
Unfortunately, the shared experience for many investors is rising taxes, not the lowering of taxes. This may be a risk you should plan on budgeting for before making your next real estate investment.
5. Timing a Market Exit
An illiquid asset like real estate takes time to be bought and sold. Most real estate agents will tell you that the sales process for the property, given that it is ready to sell, can take 2 to 3 months.
Of course, this depends on the health of the real estate market in your chosen location. Take into account that you have to get the property ready to be listed, exposed to the market, and eventually sold. Each of those steps can take several weeks to complete or more.
You can check out more here for the top market trends of 2021.
Don’t Take On Unnecessary Real Estate Investment Risks
Understanding real estate investment risks is just the beginning of your real estate investment journey, and we hope that you won’t forget these helpful tips on avoiding real estate investment risk. In addition, don’t be afraid to contact a local real estate agent or real estate investment advisor for further guidance.
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