Real Estate Investments: As Safe as Houses?

Investors often refer to a very safe investment as As Secure as Houses. This is the traditional belief that real estate is one the most secure investment options. According to the old school, real estate investing is risk-free and offers the best protection against inflation.

The world of has discovered that houses are not as safe as they used to be after several real estate crashes. This article will discuss the risks investors face when investing in real estate for sale in tulum mexico properties. These are some of the most common risks:

Risk #1: Bad Tenants

Many people who invest money in real estate do so to receive cash flows. These cashflow are obtained in the form of steady-growing rental payments. These cash flows are based on investors believing that they will always be able to find good tenants. Good tenants pay up on their due dates, do no damage to property, and are not subject to any other legal headaches.

Research has shown that investors can fail to find a tenant who is a good fit statistically. Many experienced real estate investors rank bad tenants as their number one concern. Even though bad tenants are rare, it’s possible to be faced with serious legal costs. Real estate investment is a people-oriented venture. This is why landlords need to verify credit and police records before leasing their property. This is to help mitigate these risks.

Risk #2: Liquidity risk

Real estate investments may be the most liquid investment of all. Because real estate investments require large amounts of money, and they are very risky for investors’ personal finances, this is why it is so difficult to make a profit.

Real estate investors who want to sell their property can’t find a ready market that will offer you a quick quote. The buyers who are willing and able to take on such a massive transaction are rare.

If an investor needs to liquidate stocks, bonds, or gold in a matter of minutes, they can. However, liquidating a real estate can take quite a while. Investors should not make poor investments in real estate because of this illiquidity.

Risk #3: Leverage Risks

As mentioned, real estate investments generally require significant capital. People who buy real property don’t have that much capital available to invest. So, leverage is often attached to real estate.

A mortgage is often required to buy a property. The mortgage can last for an extended time, let’s say, 30 years. The mortgage’s interest payment is several times as much as the amount that was borrowed. You should also consider that the first few monthly payments to mortgage payment are almost entirely made of interest. The principal is rarely repaid within the first four years.

Real estate is leveraged so heavily, it almost entirely relies on property prices rising. The property values do not have to fall. A simple stagnation would make interest costs insurmountable and lead to investment losses.

Real estate investments pose serious risks to your financial health, contrary to what you might think.

Risk #4 – Counterparty Risks

Many individuals who buy realty often purchase unfinished units. Developers are often willing to offer financing that is more attractive, so unfinished units are typically cheaper. However, you must be aware that buying units under construction have serious consequences.

Developers can default on investors. Developers are often unable to get necessary permits from local authorities. As a consequence, the project is often delayed. Buyers lose part of their investment because they must continue paying rent.

Real estate investment projects are therefore susceptible to counterparty hazards. These risks should be managed carefully by investors who have a plan.

Risk #5: Information Risks

The real estate markets are extremely opaque compared with other markets. The stock, bond, and bullion markets have the most up-to-date information. This data can be used by an investor to evaluate the trend of an asset class and help them make informed decisions.

For real estate information, however, only local brokers can provide the data. These brokers have vested rights and are therefore unable to provide reliable, actionable info. Therefore, the data on capital and ongoing rental values is mostly guesswork.

Buyers, therefore, need to have multiple sources of information to verify the validity of the information they get. Online real estate portals as well direct transactions between buyers/sellers have significantly reduced this risk. However, the price discovery process remains opaque.

Investing is a sophisticated business that involves a lot of knowledge and expertise in order to mitigate the risks mentioned above.

  • October 14, 2021
  • | Categories: Blog