Real estate investments are rising as a result of the expanding middle class, ongoing remittances from overseas Filipino workers (OFWs), and the openness of borders and economies. This emerging trend has the potential to draw in novice real estate investors, and the return on investment (ROI) is widely recognized to be readily apparent.
Real estate investment risks do exist, just like other sorts of investment risks, and they might hinder your attempts to increase your wealth. You will be at different comfort levels with these risks, depending on a number of things. A younger investor, for instance, might be more daring with their money than an investor who is almost of retirement age.
Financial risks associated with real estate investing are universal, and you need to be aware of them to prevent yourself from ending up in a bad financial scenario, regardless of your age, personal circumstances, or current financial status.
What are the risk factors for real estate investment?
1. General Market Risk
The real estate sector is erratic. Although predictions about the direction of the market exist, nothing is certain. Market conditions are influenced by a wide range of factors, including shifts in government policies, unanticipated domestic or foreign events, and the forces of supply and demand in the economy.
The pandemic is one recent example of how it significantly altered the real estate market. 2020 saw a slowdown or lack of demand for investment property due to nationwide lockdowns. As a real estate investor, you should always be aware of and comprehend the fluctuations of market trends. By doing this, you'll be better equipped to weather any downturns in the real estate cycle.
How to Mitigate: To forecast the success of a property investment and the ideal moment to put it on the market, you need to perform a market analysis, economic research, a property inspection, and financial projection consultations.
In order to provide yourself some wriggle space in case the market for one type of property unexpectedly collapses, you should also diversify your investment portfolio in a variety of residential and commercial properties, such as townhouses, flats, condos, and commercial buildings.
2. Structural Risk Factors
Not all real estate investment opportunities are ideal. Occasionally, there may be hidden structural problems, like mold growth or damage to the foundation. Because you'll be dealing with unforeseen maintenance issues and repair costs, this could end up costing you much more.
In addition, property depreciation is the gradual loss of value on your investments. You must choose your asset carefully because not all properties will increase in value.
How to Mitigate: To prevent purchasing real estate with depreciation potential, do extensive market research and rental property analysis. Consider the property's equity and location.
Buy from reputable developers with an exceptional portfolio of real estate exclusively to avoid this risk. As an alternative, you might hire experts to appraise the property.
Furthermore, prompt repairs and routine maintenance tasks can help guarantee that your property is in excellent shape. You can draw in customers by repainting the façade and giving it a cozy look.
3. Location risk
If you're thinking about investing in real estate, you've undoubtedly heard the saying "location, location, location" at least once. It is true that a property's location is its greatest draw. It may potentially pose a risk, though.
Since location is so important in real estate, you should carefully consider if the region is a wise investment. Look into crime statistics, ascertain whether the town or city is experiencing gentrification or new development, and determine whether the area is suburban or urban. It is better to know as much as possible about the place.
For instance, buying a condo in Cebu, one of the outsourcing cities in the Philippines, may be a wise investment given the current economic expansion, which creates more jobs and raises property values.
How to Mitigate: You can evaluate a location by keeping up with the local news. You can also assess the real estate investment risk by looking at trends and data regarding economic conditions, population growth, crime rates, and the housing prices of nearby homes.
In the same manner, visiting the place in person can assist you in exploring and learning about topics that are typically not addressed by data, analysis, and forecasts. In addition to the economic research and an inspection of the building from the inside or outside, you also need to conduct a neighborhood assessment and pose any queries you may have to the locals.
Lastly, to increase the diversity of your investment properties, buy houses in several places. Even if the value of properties in one location declines, you can still make money on the others.
4. Liquidity Risk
When compared to other assets like stocks or gold, real estate investments are less liquid. It implies that you won't be able to rapidly profit from your property if you find yourself in a tight spot and require quick cash.
For long-term profit margins, real estate investments are the best. You might have to sell the house for a very low price if your investment isn't meant to last for a long time and you need the money. You might apply for a home equity loan to lessen this risk.
How to Mitigate: To mitigate the risk of liquidity problems, it is important to have an emergency fund that can cover any short-term obligations you may have as well as to diversify your investments over time. For example, you can add commercial leasing, property flipping, and listing on online lodging marketplaces like Airbnb to your portfolio in addition to purchasing rental properties.
5. Leverage Risk
When you finance your property using bank loans, mortgages, unpaid obligations, or borrowed money, you are using leverage.
Even with a small amount of wealth, you can increase your purchasing power by using leverage. This could be risky, though, since you could lose money and the investment if you can't manage your cash flow or can't repay the loan.
How to mitigate: Your chances of losing money on the property quickly increase with the amount of debt financing your investment. Nevertheless, by planning ahead for financing costs and financial difficulties, the risk associated with leverage can be avoided.
6. Bad Tenants
Tenants who fail to pay their rent on time or at all may be at risk of generating rental income. Refuse to rent to every applicant; unsatisfactory tenants can cost you money and time, and they are worse than none at all.
Therefore, in order to make sure that these circumstances don't arise, you must conduct a thorough screening process with your tenant pool.
How to mitigate: Make frequent trips to your property to make sure your tenants don't become troublesome. Ideally, schedule semi-annual visits to keep your area maintained.
In the event that a tenant decides to vacate, evaluate the original and current conditions of the property. They should be held accountable if you discover any damage.
When renting out your property, talk to potential tenants about their obligations with regard to the terms and restrictions you wish to uphold in the contract. Check their payments each month to make sure they meet the due dates after the lease is signed and the payment options are set up.
You may avoid risky renters by pre-screening tenant candidates and looking up their histories or qualifications. You can check someone's financial capability to make regular mortgage payments by looking through their work status, pay slips, and bank statements.
7. High Vacancy
The risk of having a lot of vacancies goes hand in hand with problematic tenants. Long-term tenant vacancies are also problematic because they leave you without rental income to cover your expenses. By providing competitive rental rates, promoting your house on social media, or advertising the property with a reputable real estate agent, you can reduce this risk.
How to Mitigate: Tenants may find it more difficult to vacate their rental if you adopt a more hands-on property management approach. Get to know your clients, and make every effort to help them settle in. In addition to financial gain, you may possibly discover that property management is more pleasurable.
You can reduce your rental turnover by quickly tidying up an apartment for the next tenant. Establishing house rules and maintaining your rental units' cleanliness can give potential tenants the sense that they have discovered the perfect place to live.
8. Property damage
Hazards (like fire, robbery, or vandalism), negligent tenants, neglect on your part, and natural calamities can all cause damage to real estate.
Accidents might result from poor maintenance, such as loose tree branches, a shaky foundation, malfunctioning electrical, ineffective plumbing, or damaged walls. This may entitle you to pay your residents' potential hospital expenses.
How to Mitigate: Having property insurance helps reduce losses and lower the danger of natural catastrophes. Avoid investing in real estate that is near a forest fire hotspot, prone to flooding, or at risk of landslides.
Think about obtaining general liability insurance too. This pays for your tenants' medical bills if they sustain injuries on your property. Legal costs may also be covered if your tenants file a lawsuit, as well as help pay for property repairs.
For security reasons, think about adding a surveillance system. This is to deter illegal activity and crimes from occurring on your property.
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