THE RISKS INVOLVED WITH REAL ESTATE

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.

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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What to Consider before Buying Investment Rental Property

What to Consider before Buying Investment Rental Property

A Rental property can be an excellent way to bring in additional income as well as invest in an asset that is actually tangible; however, investing in real estate does involve more than just purchasing a property and watching the money roll in.

Many people believe that the biggest hurdle they may face is obtaining the loan; however, this may be easier than they actually think. It is other issues which you may face along the way which should be considered before you actually take the step of purchasing an investment property

First, always make sure you take the time to know exactly what you can afford. Many people make the mistake of overlooking this step, assuming that the rent alone will cover the mortgage payments and other associated costs.

If you rely solely on rental income and there is a change in the market conditions , you could find yourself in financial trouble later on.   

In addition, you need to give some thought and consideration to the type of property that will best suit you. You can find rental properties in many different sizes as well as types. 

Each of these different types can pull in different rental rates as well as attract different types of renters. So, giving thought to the property that best suits you is really an important step which should not be overlooked.

For example, if you purchase a property that is near a college or university you are likely going to find that most, if not all, of your tenants are college students. While you may never have a vacancy, you may also find that you have a continual turnover, problems collecting rent and even possible damage to the property itself.

You should always research rental properties just as you would any investment with the large amount of money involved. If you do not have the experience, the expertise or the inclination to do this yourself talk to an expert.

Not only do you need to understand the going rates for similar properties you need to decide why you are investing and what type of property best suits your budget, risk analysis and the objectives you set out to achieve

To research yourself check the areas local newspaper for information on going rental rates as well as the internet. The internet is predominantly dominated with Real Estate Agent or Broker advertisements which may not provide a true indication of the actually going rate. A desperate private landlord will drop their price and advertise this usually well before anAgent or Real Estate Broker would do.

Another major consideration is that you will need cash flow to take into consideration expenses which may come up along the way. Ideally, you should have a reserve fund or cash buffer established to tide you over in the event you experience emergency expenses or your property is vacant for a period of time.

Before you commit to purchasing a property, make sure that you obtain some sound advice. This doesn’t mean an Uncle or a mate who knows a cousin who’s Aunty has 30 properties. It is important you take information from an experienced advisor not emotionally or financially involved in the transaction. Making a mistake and purchasing the wrong property can be catastrophic to your financial well being. Don’t allow the sake of a few hundred dollars or so stop you from obtaining independent advice.

In addition, you should make sure you understand your responsibilities as a landlord. Keep in mind that your obligations are typically regulated by the statute laws or legislation in the area which the property is located.

Some states have very little regulation while other states are highly regulated.

If you fail to follow state regulations you could find yourself in for quite a bit of financial as well as legal trouble. It is always best to educate yourself ahead of time.

Finally, make sure you consider how much insurance you will need to not only property the property in the event of damage or destruction but also to cover all liabilities as well. One liability claim can be enough to cause serious repercussions so this is not an issue where you want to take a short-cut. Remember that it is your responsibility as the landlord to provide liability insurance, not your tenant. If someone should slip and fall on your rental property then it will be you who is responsible, not the renter.

Rental investment property truly can be an excellent investment and long term wealth builder provided that you are prepared and understand what you should expect from the outset.

Do not be afraid to seek help where you need it, especially from associations and from professionals such as attorneys. This is the hallmark that can often set a successful rental property investor apart from one who fails.

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