Dec 13, 2013

Evaluate And Minimize The Risks in Real Estate Investments

Written by : Zara Smith| 0 | Real Estate
Different risk and return of investment for th...

Different risk and return of investment for the different investors (Photo credit: Wikipedia)

Every investment has some risk associated with it. Real estate is no exception. However, the risk of failure should not make you averse to investing and miss out a golden opportunity to make a great deal. Instead, you should make an informed decision by getting educated in the various risks involved in real estate investment.

Investing can be a scary business, especially for beginners. However, your fear should not hold you back from jumping in what we are seeing as one of the best times of making some money out of real estate. At present, out of all the available investment options, real estate presents the best option to earn profits. But to make the most of it, first understand the risk factors that are associated with investing in reality market.

So what are all the risks that can turn a property deal sour?

Uncertainty: The trends keep on shifting in favor of different types of investment. You can never be too sure of the property market and this uncertainty is what presents the biggest risk to most first-timers. There have been numerous occasions when a buzzing real estate destination suddenly went spiraling downwards, leading to loss of money for thousands of investors.

Dubai makes for a perfect case study. The city was the de factor foreign real estate investment destination for people around the globe. However, the Great Recession took its toll on the construction business and property values which had climbed peaks with blinding speeds went bust with twice the speed. Such happenings are not one off.  There are so many factors that affect the real estate appeal of a place that one can never know what his investment will be worth in few years time. Innocuous reasons such a natural disaster, or a sudden mass riot can have a lasting effect on the property market of that place.

Speculation: If you are engaged in property speculation business, there are high chances that you might end up losing even more than that you have invested. While buying a home in a speculative market can be tempting as it is one factor that is responsible for the exciting returns generated. It is mostly investors who create speculative conditions where prices defy the normal demand-supply dynamics. Markets which are primarily end-user driven are less trolled by the investors and hence suffer from less speculation in this regard. Prices in such market are more realistic and in contrast with the speculative markets where there is little link between prices and fundamentals.

Interest rates: The biggest risk for commercial real estate is the interest rates. Most of such properties are bought using interest-bearing assets such as loan or a bond and the fluctuating rates have a bearing on the final price being paid for the property. The interest rates also have an influence on an individual’s ability to purchase residential properties by increasing or decreasing the cost of mortgage capital.

Inflation: Many times investors fail to see how inflation can affect capital expenditures and drive the expenses up. A sudden rise in inflation can drive your future investment strategy nuts by increasing the budget to an extent where you leave the thought of investing altogether. Not only does it affects investment properties but also has a bearing on rent or lease properties. In an uncontrolled inflationary economic condition your annual increase built into lease agreement can fail to make up for the annual inflation reducing your cash flow and total capital amount.

All these risk factors if not taken care of beforehand can retard your investment progress and lead to lot of distress. If you are a first timer, engage the service of a real estate agent, and complete due diligence prior to take any decision.

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Zara Smith

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