Real Estate Investment – top 5 Risks

It is a capital intensive business and very dependent on high cash flow. If not well understood by an investor, it might be risky delving into it.

Real estate Investment

It is an undeniable fact that real estate investment is a great means of acquiring wealth and money with lot benefits such as purchasing and owning properties and also earning from rental. However, there are lots of risks associated with real estate investment even though it looks relatively safe. Not every investor can be guaranteed of success in the industry. Real estate refers a property.

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The property might be a land and buildings along with its natural resources such as crops, wood, water etc. The process of purchasing, owning, management, renting out, leasing and sale of real estate for the purpose of profit is called Real Estate Investment. It is a capital intensive business and very dependent on high cash flow. If not well understood by an investor, it might be risky delving into it. Sources of properties in the industry include banks, real estate brokers, public auction, individual sales, government agencies etc.

Just like any other business or investment, risks in real estate investment are unavoidable. Every investor, both the experienced and newcomers, need to be fully aware of the risks involved in the industry.

Why Real Estate is a Risky investment?

The following are risks associated with real estate investment:

  • Volatility of the real estate market: The industry is well known for its volatile and flexible behavior amidst varying economic conditions. Although, the industry is growing quite wonderful but it is not yet guaranteed in terms of continuity for a long period of time. The market is very dependent on the economy. For example, purchasing a property at a time when demand is high might be a risky. If the economic changes is unfavorable, you might have to sell the property at a lower price, meaning a loss.
  • Location of properties: Location of properties is very important. It is must be considered before purchasing any property. Location determines demand and supply. While lower prices in a location might look enticing, it might be risky purchasing properties in there.The population might be small or there might be lots of other similar properties owned by another firm or investor in the same location. Also, crime rate is dependent on location.
  • Unseen structural flaws and faults: An investor may procure a property with concealed structural flaws. The investor might end up doling out funds for repairs and maintenance. A proper evaluation should be done before purchasing any property.
  • Depreciation: This is the decrease in value of a property over time. It is the opposite of appreciation where a property increases in valuation. Generally, all properties are expected to appreciate but not all will actually do. A property located in an area with continuous increase of environmental pollution will surely depreciate.
  • Bad Occupants / Tenants: Although,tenants are required in the industry for income to abound. Having a tenant occupying a property does not always means profit will abound. Some tenants might be tough to deal with. Some tenants might, intentionally or unintentionally, not pay up their rents. Some Tenants might even damage properties thus reducing the quality and aesthetics of the property and the investor might end up funding the cost of repairs.
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Harish is the editor at howto Finance. Here we publish high quality trending news topics on Business, Finance, Loans and Credit-Cards etc. Our editorial includes worldwide topics.

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