"As Safe as Houses" is a common term used by investors to describe an exceptionally safe investment. This demonstrates the conventional wisdom that one of the safest investment possibilities is real estate.
The conventional wisdom holds that real estate investing offers the best protection against inflation and is generally risk-free.
But as a result of several real estate disasters, the globe has recently learned that the residences aren't as secure as previously thought.
The several hazards that an investor may encounter when purchasing real estate properties are listed in this article. Among the typical dangers are the following:
Potential Problem Tenants
Many real estate investors typically do so in order to benefit from the cash flows that come with owning real estate. The rental payments represent a steady rise in the shape of these financial flows. These cash flows are predicated on the idea that investors can consistently locate quality tenants. Reputable tenants don't damage property, make no additional legal problems, and pay their rent on time.
Nevertheless, studies have indicated that there is a statistically significant likelihood that investors won't always locate a suitable tenant. Most seasoned real estate investors rank bad tenants as the worst risk.
Landlords want to check credit reports and police histories before renting out their properties; the idea being to reduce the risks associated with bad tenants, of which there is a good chance that you may wind up with large legal costs if one comes your way. Real estate investing is, therefore, also a people's business.
Hazards to Liquidity
Among all the investment types, real estate is most likely the least liquid. This is due to the substantial financial commitment that real estate investments need from each investor's personal funds.
As a result, there isn't a ready market that can offer you up-to-the-minute estimates on your home if you're a real estate investor looking to sell. Furthermore, there are very few purchasers that are prepared to engage in a transaction of size.
Therefore, if necessary, an investor can liquidate their stocks, bonds, and gold in a matter of minutes. On the other hand, real estate takes a very long time to sell. It is necessary to factor this illiquidity into the real estate transaction to make sure that investors aren't taking a risk.
Take Advantage of Risks
As mentioned before, real estate investments typically necessitate a substantial financial outlay. The majority of real estate buyers don't have that much extra money to put down on a particular home. Thus, in any given market, leverage is associated with more than two thirds of the real estate that is bought and sold.
A mortgage is typically used to purchase a home. The mortgage has a long payback period—roughly thirty years. As a result, the interest owed on the mortgage is greater than the initial loan amount!
Furthermore, the majority of the initial few monthly mortgage payments are made up of interest. Therefore, very little principle is paid back within the first four years or so!
Real estate is heavily indebted, therefore its only source of income is an ongoing increase in property values. There is no reason for the price of real estate to drop. Even a slight halt would put the investment in the red and make the interest charges unmanageable!
Contrary to popular belief, real estate investments are therefore vulnerable to some significant financing concerns.
Counterparty Risks
Many real estate buyers typically purchase unfinished apartments. In general, unfinished units are less expensive, and developers are more inclined to offer financing with better terms. Purchasing under construction condos does, however, come with some significant dangers.
The developers' default puts the investors at risk. Additionally, the developers frequently fail to obtain from the local authorities the necessary approvals. The project is thus delayed. Due to their continued rent payments, buyers ultimately lose some of their investment as a result of this delay.
As a result, counterparty risks are common in real estate investment transactions. In order to reduce these risks, investors must be careful and have a strategy.
Information Risks
Compared to other markets, the real estate sector is incredibly opaque. The markets for stocks, bonds, and bullion provide current and reliable information. The information can be used to assess asset class trends and guide decision-making.
But in the case of real estate, local brokers are the only sources of information. Due of their financial interests, these brokers have no incentive to offer accurate, useful information. As a result, most information regarding capital and ongoing rental values is speculative!
As a result, buyers must acquire information from a variety of sources in order to verify the accuracy of the information they are given. With the introduction of online real estate platforms and direct transactions between buyers and sellers, this risk has also been significantly reduced. The process of price discovery is still mainly unknown, though.
