THE RISKS INVOLVED WITH REAL ESTATE
Posted on January 18, 2015 by REDDOG Advertising & Marketing Strategies
My Property Coach
Author - Antonio Sawlwin - Santolo
All things to do with making money carry with them some degree of risk.
The same holds true with real estate investing.
Despite the promise of high rewards you should be aware that plenty of people loose substantial amounts investing in Real Estate, just as people lose money investing in the share market or on the currency markets.
Unfortunately there are occasions when peoples ambitions do not match with the reality of the risks involved and the potential losses can even be just as high as the potential rewards.
For this reason you need to take every possible precaution in order to insure that you minimise your exposure to risk and whenever possible are prepared, financially for a worst case scenario. You need to also be in a position with your thoughts that mentally and for peace of mind you learn understand the risks involved and be in a position to manage the consequences of those risks if the time comes.
It Wont Happen To Me
Unfortunately, most people will have the “it won’t happen to me mentality” and often it is these people who make critical mistakes that can’t be recovered from. Whilst you may be a good money manager and budgeter you cannot control what other people do. What if your tenants are always late paying the rent, what if the areas suffers a natural disaster and property prices plummet. No matter how much you plan these things are generally out of your control.
What Are The Risks Involved
The most obvious risk when it comes to real estate investing is the immediate risk of losing money, your assets and your equity that you’ve built up in other assets.
A mistake for a couple in their 50’s can be a huge blow to their lifestyle, not only know but in their retirement as well.
Depending on on how large your investment was to begin with and how much other debt you carry but the worst thing that can happen during the course of a real estate investment gone wrong is finding yourself in a position of little control with banks and creditors deciding your fate.
While I’m certainly not trying to talk you out of investing in real estate all together it is a good idea to have a realistic view of the risks and the potential rewards.
Obviously the main risk you need to think about are your income and how secure this is, the possibility of tenants not paying rent or damaging the property and what if you cant find a tenant for an extended period?
Then there is the risk of making the wrong investment decisions, unfortunately this is a lot more common than people realise. Picture mum and dad living in the suburbs, over the past 10 -15 years they have been paying off their home and at the same time the property has grown in value providing equity to use for investment purposes.
They discuss investing and decide Real Estate is the safest and most common way to build wealth and therefore look at purchasing an investment property. They buy the paper and begin looking through the masses of real estate listings – this is where the trouble begins, very often people will choose an area close to their own home to invest in, after all they have done very well over the last 10 -15 years and they can also keep an eye on the property.
The problem is the area may have been a good buy 10 years ago but the growth may have already occurred. Remember there needs to be a growth driver ie, new jobs, new transport corridors, urban sprawl etc.
The second problem is that buying a property for investment purposes is a far different criteria than purchasing a home to live in. After all you are investing in an asset to make money, not to admire the gardens. As an example the tax benefits alone can be as much as $20,000 per annum different when comparing an old property with a new property.
The appliances you have can also have a large effect on the outcome ie, ducted air conditioning compared to a split system.
Another risk common to real estate investing is the fact that stuff happens. Market trends tumble, companies go out of business leaving towns and the local real estate market in shambles, accidents happen during the course of the work, natural disasters occur, and buyers change their minds and pull out at the last minute. Each of these things can have devastating consequences and are almost always events that are completely beyond your control as a real estate investor.
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If that wasn't enough many investors fail to have a proper inspections conducted and find out when it is really too late that there are serious structural problems and other sorts of things wrong with the property.
These things cost money to repair and cut into profits, occasionally resulting in a loss. The thing is that once you find out something is wrong with the property you are honor bound to either reveal the problem to potential buyers or fix the problems before selling the house.
Do not allow the risks of real estate investing prevent you from taking the plunge.
They are spelled out here to remind you that prudence and caution are wise when investing in real estate not to talk you out of this potentially lucrative field of investing. If you are interested in real estate investing there is no reason on earth you shouldn’t take the time and make the effort to learn more about its potential.
Be A Little More Savvy
A savvy investor will look at property just as any other investment, first and foremost the figures need to stack up, do not ever purchase potential is a good rule of thumb – remember if the the current owner is asking a higher price as the property has potential and you agree to pay a premium on the potential you may be in fact giving away the benefit and return of that potential from day one if and when it eventuates.
Accept the fact you may have to purchase in an area that you do not know or may be purchasing a property that would not suit your requirements as a home. These are all emotional ties and just as you would not question the location of BHP’s smelters if you had shares you can not let your emotions or fear stop you from looking at the best investment option rather than what makes you feel more comfortable, sure you don’t want to be in a state of constant fear either.
Accept The Risk
There’s an old saying in business that if you are Going To Be In The Business- Then Be In The Business, as an example a shop owner who only half fills their store will soon realise that an empty store does not make a conducive buying environment. So saving money by only holding half a shop of stock is in fact a poor decision.
With Real Estate the business has risks, just like any other business, as mentioned previously some of these things may be out of your control.
So what is the answer?
You need to assume that the risks involved are going to happen and not might happen and therefore you need to have contingencies in place. You also need specialist help in setting up your finance structures to minimise your exposure and a professional adviser to work out the what if strategies.
Most people would consult advisors before spending over $300,000 on the sharemarket – property is no different
Exposing the risks of Real Estate investing and understanding how the majority of people make mistakes is not meant to put you off investing, in fact armed with the understanding that you are not an investment expert this will help you make that decision to obtain independent advice prior to investing.
Just like most things we undertake – Failing To Plan is Planning To Fail
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