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. This is a risky business and every property purchased doesn’t always pan
out to become a successful investment. There are many risks involved in real
estate investing and you would be going to 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.
Unfortunately, there are very few one
size fits all risks for real estate investing, as each type of investing is
inherently different. This means that each type of real estate investment will
involve a new set of risks. Below you will find a brief overview of different
styles of investing and the common risks that are involved in each.
Rental
Properties
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. First and foremost is 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.
Other risks include the risk of
getting bad tenants. This is particularly hard on first time investors. Bad
tenants are costly and in some cases destructive (which leads to even greater
expense). Vacancies are another risk for rental properties. These properties
are only costing money as they sit empty rather than earning money as they were
intended. Short turnovers are in your best interest as are long-term tenants.
“Flipped”
Properties
This is one of the most enjoyable
types of property investments 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.
The risks are simple but often
overlooked and they can have a significant impact on the overall success or
failure of the project. First of all, the biggest risk is in paying too much
for the property. Other risks include underestimating the costs of repairs,
over estimating the ability of the investor to do the work him or herself,
taking too much time, experiencing a down turn in the housing market, making
the wrong judgment call for the neighborhood, becoming overly ambitious, and
getting greedy. Sometimes it is much better to walk away with a lesser profit
than to end up loosing money by holding out.
Personal Residence
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. Buying a home that is in a
‘borderline’ area or one that is not showing obvious signs of growth is one of
the biggest risks. This puts your home in the position to lose rather than gain
value. This can make your home a burden rather than the investment it was
intended to be. Other risks involve is becoming involved in a loan situation
that is not at all beneficial (such as an adjustable rate mortgage or an
unreasonable balloon payment).
Perhaps the biggest risk of all when
purchasing a personal residence as an investment is failing to get a proper
inspection that could rule out potentially costly and even dangerous problems
within the home your purchase for you and your family. Toxic mold is one
problem that comes easily to mind that most proper home inspections would almost
immediately rule out. Others include structural problems that are costly to
repair and dangerous to leave in disrepair. Each of these risks should be
considered before an offer is made on any property.
For those seeking to turn impressive
profits in short order, real estate is one way in which this can be
accomplished. It is in your best interest however to be aware of the risks that
are involved and take careful steps to minimize those risks. Taking these steps
now may cost a little more on the front end but in many cases the pay off for
doing so well outweigh the expenses.
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