Real estate investing is one of those sectors that every investor aspires to own a share of it because of its appealing returns in the long run.
Even though it offers the best investment opportunity, investing your hard-earned money will not be a good idea without understanding the underlying risk.
Whether you are an experienced real estate investor or a new investor, knowing the risk that you are exposed to is very important in business.
All the risk herein discusses affect real estate companies and real estate investors alike.
1. Liquidity risk
When you enter into the real estate business, the market is never continuous. The demand for properties is never constant, there is a time when there is high supply and no demand there is time demand is high and low supply.
Sometimes you might have your property in the market and no investor is willing to buy the property, this will leave your property in distress and will lower the final price.
2. Financial risk
A lot of real estate investors tend to take a huge amount of loans to finance their real estate properties. Although there are good benefits associated with using leverage to finance properties. The downside is that due to unforeseen economic performance, the interest rate can fluctuate to the upside and this will increase the cost of service the loan.
Besides, when the general market runs into recession, the commercial properties tend to suffer the most and you will put yourself at risk of having your property foreclosed.
3. Management risk
This risk is associated with the ability of the management to respond to the current and unexpected economic situations in the country. If your property is under good management then your property will suffer the least when tough times of economy sets in.
4. Legislative risk
These are restrictions that are associated with how the properties in a particular area are being used. it is not limited to tenant laws, registration procedures, local zoning that the government imposed on properties.
When investing, it is important to remember the presence of these risks.
5. Environmental risk
Buyers beware is an underrated statement in the real estate business. How many properties have you seen being built in riparian lands and demolished by government agencies? You need to be aware of jurisdictions under which the property is in before investing.
6. Cyclical risk
Real estate usually experiences booms and recessions in response to the world economy. This has resulted in associated cyclical risks. As an investor, you need to define your investment plan that factors in past data of the market so that you make a sound investment.