Every opportunity comes with its elements of risks.
Some come with high risks and others are low risk. The level of rewards is typically dependent on the level of risk. Real estate is generally classified as a low risk sector, but It does have its own share of potential risks. Understanding these risks will help you to reduce your exposure to them.
Here are some risks associated with real estate
- Value depreciation. Majority of the time, property appreciates in value, but there are instances where property can depreciate. For instance, if a neighborhood where a property is located becomes ill-repaired and broken down. The properties in the area may lose value.
- Lack of liquidity. Sometimes, it can take a long time to find tenants or buyers for a property. This could be due to location or market conditions. This is a risk because it means money is tied down without earning returns.
- Macroeconomic risks. A piece of real estate can be affected by the general economic climate. For instance, if the economy of a country goes into recession, this could affect the ability to buy, or lease a property. In another instance, if inflation rates are very high, the cost of maintenance of the property could very easily outrun the proceeds from the rental or sales income.
- Natural disasters. These are situations beyond human control, such as storms, earthquakes, fires an others. These are risks that always face property.
- Maintenance costs. All properties require maintenance. A property that is not well cared for, will lose its value. However, the cost of maintenance can be a risk, as it could hamper profitability
All of these risks can be managed by acknowledging them understanding them and planning for them.
How to manage these risks…
- Ensure that you buy properties that have potential for value growth, by type of property or by location. If you have a property with growth potential, even if the area goes down, you can leverage on the property potential to improve your proceeds and avoid loss of value.
- Property investment should make up a portion of your assets, but you should always have a portion that is liquid assets. This prevents you from the risk of depending solely on property for liquidity, and gives you time to sell or rent out your property.
- Macro economic risks may be beyond your control, but if you have a general understanding of local and global economic trends, you can always plan adequately.
- Natural disasters are out of your control. Insurance is one of the ways to protect your assets.
- Ensure that you understand the in’s and out’s relating to maintenance. This helps you keep maintenance costs down. Also, a habit of regular maintenance will keep your costs better than allowing things to break.
Overall, the real estate sector is cyclical by nature. It has ups and downs. Experienced real estate investors have gone through three, four or even five cycles in their lifetime. The secret is that after each down cycle, there mostly comes up cycles that will exceed the previous peak. Hence overall, long term, the property will generally grow in value over time, making it a good investment
