Gauging the risk in Real Estate
24 February, 2024 / Articles
Should I invest in real estate? A question many ask but stands out as an elephant in the room. Real estate is not your usual investment option such as stocks and bonds. With investment in real estate, you cannot play fair. It’s all a game of chance; risk and the money at stake is always significant. The best approach towards real estate investment would be to be wise enough to confront the fact that risks exist and you have to recognize where these risks lie head-on.
There are a few ‘one size fits all’ risks for real estate investments. Quantifying these risks might also be hard because there is no widely accepted method for assessing investment risks associated with a specific property. One has to understand that each individual property has its own unique set of variables based on location, payment of rent from the tenants, occupancy rates; the list goes on and on.
The first step towards assessing risks in investing in real estate is identifying areas where you would incur significant loss exposures. Look around, most of the millionaires will attest that their fortunes were made in real estate, but look deeper and harder, the few honest ones will tell you that they have lost fortunes in real estate along the way. What will you incur in losses if the occupancy rates or uptakes are low? What would be the impact of the ever-rising interest rates on your investment? When the cost of borrowing rises, the price an investor would be willing to put into the investment will certainly be lower. How would this affect your project? What about a risk of being stuck with a bad tenant or no tenants at all? You would now be in a position to estimate the probability of potential loss and analyze how it would affect your investment.
Now that you have identified the risks and quantified them, how do you manage these risks? Would you eliminate them or mitigate them, or change your strategy altogether? Is there a huge supply of newer properties, which will pose as competition to your investment? A risk management plan would help you come up with an outlined list of risks you would expect and how you expect to handle them. Assigning the right tool for the job, I’d call it. You can’t give a small spoon to a sailor to use it as an oar, it just wouldn’t do. Spread your risks, especially in real estate. Do not purchase all your property for investment in one area. Diversify into multiple properties. Have a back up to your back up. Now that you have your risks, all quantified and how you expect to deal with them, do you leave it at that? Definitely not. You need to re-evaluate the market constantly, identifying new risks coming up in the real estate sector.
What you need to understand is that the higher the expected returns, the higher the risk you will need to take. It’s important to know just how daring you are in the real estate industry. With that, you need to look out for opportunistic prospects and which current real estate properties will offer small, continual, reliable and dependable income. However, one of the greatest fascinations of real estate is that it’s tangible; for those investors who want to see their investment and get involved in it hands-on.