11 Most Common Risks Involved In Real Estate Investment

Things that nobody told you about investing in real estate:

A lot of investor all around the world invests in real estate because they live in their own bubble. To them real estate is the easy form of investing money which has high returns. The reason behind this misconception of the people is because they never dipped their feet in the water. Once they step in the market and begin their journey of investing in real estate, the reality hits them which is much more than they thought it would be.

#1. Time, Time and Time:

  • Investing in real estate is not like buying your favorite candy from the grocery store. It needs a lot of research to be done before you make any decision.
  • Investing in the real estate is the time game. You need to a lot of free time in order to do your research regarding what type of property you want to invest in, if you are going for the private or commercial property and so on.
  • A lot of investor cannot get through their plans of investing in real estate just because they do not have a lot of time on hand to invest.
  • Some investor start with a lot of enthusiasm but as time goes by; they start losing interest and simply give up.

#2. It's All About Having Capital:

  • Investing in real estate is probably one of those investments that require huge amount of capital. You cannot buy any property, be it private or commercial without having any capital in hand.
  • A lot of people who are low on capital prefer to go for loan which in other words means that their closing cost will go high since they will be paying to the company or bank preceding their loan.
  • A lot of go down the mortgage road and ends up paying all the rent for their monthly mortgage which means that no matter what route you choose, real estate investment is all about capital.

#3. It Takes A Lot Of Time to Grow:

  • When it comes to investing in real estate, people think that they are going to make a lot of money out of it or the value of their property will increase within days. However, the truth is not close to their imagination.
  • Real estate market happens to be one of the slowest growing markets. The prices of the real estate hardly increase over night.
  • In fact, most of the time, the price of real estate stays exactly same even after years which means that the money you have invested by investing in real estate is losing its value.

Real estate market happens to be one of the slowest growing markets. The prices of the real estate hardly increase over night. In fact, most of the time, the price of real estate stays exactly same even after years which means that the money you have invested by investing in real estate is losing its value.

#4. Investing in Foreign Property:

  • People usually for the sake of investment, prefer to buy property in foreign countries, considering it be a wise move. However, there are a lot of barriers and risks involved in doing so
  • The taxation system for investing in the host county usually varies from the foreign countries. There is a lot of paper work involved which can be over whelming.
  • There are certain political risks involved as well which can make it difficult for you to maintain the property in the foreign country. With the change in political power, i.e. from being completely democratic country to partially democratic country, the terms and conditions of owing a house can drastically change.
  • Resale of the house is also another important issue when it comes to buying a house in the foreign country.

#5. Real Estate Is Not The Horse You Need To Bet On:

  • To people, investment is mostly the race of long term benefits and high returns on investments; however, real estate is not the horse that will win.
  • Yes, it may help you against the inflation but in the long run, stock market is the one that can get you much higher returns in the long run.
  • The maintenance, taxation and closing costs will cause you much more than you earn by investing in real estate.

Rental Property:

A lot of people prefer investing in real estate for the sake of renting it out. Back in their mind, it is one of the best forms of investment. However, there are some cons attached to the rental property, some of them are as bellow:

#6. Asset Concentration:

  • One of the major drawback of rental investment is that owner spends more money on flipping and sweats equity (sweat equity means spending money on enhancement, sustainment and maintenance of home which inflates the value of house. e.g. refurnishing, repainting and restoring the value of home).

  • Apparently, it increases the value of your house and owner can charge a good amount of rent from the renter. One of the main disadvantages of rental property is asset concentration.

#7. Liquidity Risk:

  • The greatest criticism is that investment in real rental property or land is not liquid, means it cannot be converted into money quickly.

  • It includes a lot of hassle when it comes to selling property, you will have to find buyer on your own or you will have to ask any broker to find buyer means you will have to pay brokerage to him.

#8. Difficulty in Renting it out:

  • People prefer rental investment with the speculation of having money on the monthly basis. Sometimes one may not find good tenants that guarantee rental amount on a regular basis.

  • Sometimes the owner may be unable to find any tenants due to some reasons like property is located far from town, etc.

  • It is the time where the investment propagates no profit or income.

  • Solving the renter issues are the responsibility of the owner. One can procure a property administrator to help with the up gradation and maintenance work.

#9. Tax System:

  • Real estate tax system is quite different from other sorts of investments. If one suffers from a loss in rental property, he cannot balance his loss by offsetting other income resources.

  • Sometimes, taxes amount increases faster than the amount of rent. These detriments are generally little, however when combined, they make a momentous cost.

#10. Damage to the House or Multi Real Estate Apartment Units:

  • If something terrible happens to your house that the insurance company cannot deal with, then you would find yourself in a great trouble.

  • Regardless of your due constancy in checking good renters, if you find a renter who is poor and a late payer and whose companions, adherents, kids and pets leave a trail of pulverization in your house, then the every year devaluation recompense amount appears woefully insufficient. The issue with the fixation is that it's not assorted at all.

#11. DAMAGES CAUSED TO HOUSE BY THE TENANTS

  • The damages caused by the natural disasters are not the only thing that you need to worry especially if you have Tenant in your house.

  • A bitter fact about renting out your house is that the Tenant never feels the ownership of the house and hardly treats it like its own. This is the reason that most of the time when a Tenant leaves a house; you come across a lot of hidden damages that are done by them.

  • In order to find a new Tenant, you will have to fix all the damages which can cost you handful of money.

  • There are two ways to avoid this problem i.e. you can either prepare a legal document that says that the Tenant will return the house in perfect condition and make it part of the agreement, which can take a lot of work.

  • You can also in order to keep your house safe from such damages, decide to not rent it out at all. However, in that case you will have to let go the monthly rent that you were previously enjoying. Either ways, there is an element of risk involved in renting or owning a house.

What Is Better Than Investing In Real Estate?

If one considers few advantages and many disadvantages of the real estate investment, everyone needs an alternative investment strategies in order to achieve his desired profit. Stocks are property investments and are similar to real estate.

However, stocks offer a few decisive advantages, for example, stocks are more liquid, require less work to be cared for and can be hedged through options against a value loss.

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Long Term Investment:

The best alternative to real estate investment is the long-term investment in equities. Many investors make the mistake of comparing a stock investment of a few days with a real estate investment of many years.

The ups and downs for equities appear particularly strong when looking at small time units. Compared with the depreciation horizon of the property (of 100 years, a property is depreciated in many countries with 1% per annum) also shares have a steady development.

It is almost impossible to estimate the respective maximum or low rates of an investment class or investment. Both real estate markets and stock markets have risen significantly in recent years.

Nevertheless, it is very possible that both equity and real estate markets will continue to rise. If real estate is not invested in REITs or property funds, the investment also depends on the individual investment and the time and work that an investor is willing to invest in the property. Equities and securities are easier to handle and have less local boundaries with similar returns.

There are many reasons to opt for the long-term investment through a diversified equity and securities portfolio; some of them are as follow:

Things Do Get Normal:

When it comes to investing in the stock market, one thing that everyone needs to remember is that history repeats itself. No matter how much inflation or fall stock market faces, it will eventually come back to its normal self, be it sooner or later.

A passive investor will always end up with win-win situation with his passive investment strategy as he knows that the market will return to its original prices.

However, on the other hand, if he goes with the real estate investment and due to any reason the prices instead of increasing starts decreasing, there is a high chance that the property you bought will stay low priced and won’t bring in much benefits. Real estate market takes the longest time to recover inflation and even then chances are that the prices might not touch their old glories.

Balanced Portfolio:

One of the most important tips that every investor should know is the importance of the balanced portfolio. Yes, it is important for you to understand that your portfolio is well balanced and has diversity in it. Rebalanced portfolio can help you with:

Minimized Risks:

If you have diversified portfolio then it means that you have invested in more then one thing and have made a low risk investment. However, investing in real estate means that you are using all your capital to buy a piece of property which may or may not bring you any benefits.

Stable Return:

Investing in more than one thing means that you are more likely to enjoy stable returns. Unlike real estate, the only returns you get are not from rent but from different sources.

Low Fees:

One of the major benefits of choosing passive investment is that you have to pay fewer fees. The reason behind it is that you do not have to analyze all the securities in index, which means you have to pay low fees.

Final Verdict:

No matter how tempting real estate investment seems to be, it is a lot more work and effort as compare to passive investment in stock market. The investor ends up paying huge amount of money while there is no guarantee of getting huge returns. Furthermore, it is not easy to resale your property. However on the other hand, choosing stock market means that you are opting for fewer risks and much more diversity.

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