Limiting Common Risks Involved in Real Estate Investments

While a good many millionaires will agree that their fortunes were made in real estate, the honest ones will also tell you that they’ve probably lost a few dollars along the way.  This can be a risky business for those who don't do their homework.  It's certainly possible that every property purchased doesn’t always pan out to become a successful investment. Because there are risks involved in real estate investing, it is wise that you go into battle prepared.  Take a moment to carefully study a few common risks and work to avoid them when planning your property investment strategy.

Unfortunately, there are very few “one size fits all” risks for real estate investing, as each type of investing is inherently different. This means that each type of real estate investment will involve a new set of risks. Below you will find a brief overview of a few different styles of investing and the common risks that are involved in each.

Rental Properties

This type of investing offers some risks that are unique and some that are also risks when investing in properties that are lease-to-own or rent-to-own as well.  First and foremost is the risk of failing to make a profit.  If the property in question cannot achieve an adequate monthly income to cover the expenses of operating the property then it is not a solid investment.

Other risks include the risk of getting bad tenants. This is particularly hard on first time investors.  Bad tenants are costly and in some cases destructive (which leads to even greater expense).  Vacancies are another risk for rental properties.  These properties are costing money as they sit empty rather than earning money as they were intended.  Limited turnovers are in your best interest as are long-term tenants.

Ways to avoid these mistakes are to make sure you know and understand your numbers before you purchase.  Buy the property at "undermarket" prices, increase rents and reduce expenses to give you a good profit margin.  Also, carefully vetting and pre-screening potential tenants is critical to your long-term success.

“Flipped” Properties

This is a favorite property investment for many ‘hands on’ investors.  This allows the investor to roll up his or her sleeves and take an active role in creating the masterpiece that will eventually bring in serious revenue (at least that is the hope).  This is also one of the riskier investments, particularly when trying to turn a profit in what is known as a buyer’s market.

The risks are simple but often overlooked and they can have a significant impact on the overall success or failure of the project.  First of all, the biggest risk is in paying too much for the property.  Other risks include underestimating the costs of repairs, over estimating the ability of the investor to do the work him or herself, taking too much time to complete the repairs, experiencing a downturn in the housing market, making the wrong judgment call for the neighborhood, becoming overly ambitious, and getting greedy.  Sometimes it is much better to walk away with a lesser profit than to end up loosing money by holding out.

Personal Residence

Keep in mind that your personal home can be a valuable tool to help you in acquiring investment properties.  The intention is that your home will gain in value over time and that the equity in your home can be leveraged to purchase your first, and perhaps, future rental investments.  There are risks involved in this transaction as well.  Buying a home that is in a ‘borderline’ area or one that is not showing obvious signs of growth is one of the biggest risks.  This puts your home in the position to lose rather than gain value.  This can make your home a burden rather than the investment leveraging tool it was intended to be.  Other risks involved is becoming involved in a loan situation that is not at all beneficial (such as an adjustable rate mortgage with an unreasonable balloon payment).

Perhaps the biggest risk of all when purchasing a personal residence as an investment leveraging tool is failing to get a proper inspection that could rule out potentially costly and even dangerous problems for you and your family. This also applies to any investment properties you buy as well.  Toxic mold is one problem that comes easily to mind that most proper home inspections would almost immediately rule out.  Others include structural problems that are costly to repair and dangerous to leave in disrepair.  Each of these risks should be considered before an offer is made on any property.

For those seeking to turn impressive profits, real estate investing is one way in which this can be accomplished.  It is in your best interest, however, to be well aware of the risks that are involved and take careful steps to minimize those risks.  Taking the proper steps to mitigate risk may cost a little more on the front end but, in many cases, the pay-off for doing so will outweigh the expenses.