Understanding Risks Involved in Real Estate

Real Estate

The real estate business is one of the most lucrative businesses in the market. Whether it’s renting out residential suites and business complexes,  Air BnB, or simply selling homes to potential clients, any investment in real estate is bound to yield revenue. 

But what are the risks involved? Every investment involves risks right? A risk is simply an unexpected occurrence of events that shifts the paradigm of the expected results. In business, this is quite common. So, before you dive into real estate, you should understand the risks involved. Understanding these risks helps you be better in the market.

What are the Different Types of Real Estate Investment?

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The most known real estate investments are five;

1. Residential Real estate

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Residential real estate investment involves a fleet of apartments, condos, and living areas that people can rent or buy. In this type of investment, the revenue is through rents from their tenants.  This value may appreciate depending on the market conditions and interior decor of the property. For instance, an apartment fitted with a great wood closet and kitchen cabinets(OPPOLIA is the best candidate for such), will accrue better revenue. 

2. Commercial Real Estate

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Commercial real estate involves renting or leasing out units to businesses. Unless the property is owned by the business, these businesses pay rent to them for leasing the space. Commercial property is leased on a quarterly, semi-annually, or yearly basis. Businesses such as retail and industrial businesses fall under commercial real estate.

3. Crowdfunding Investment  

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Simply put, crowdfunding real estate investment creates a pull of investors that are interested in a property that has the potential to increase in value. Because an investor may purchase a portion of a property and become a stakeholder, real estate crowdfunding is comparable to equity investment. Crowdfunding allows businesses to obtain financing that they otherwise would not be able to obtain. Most real estate crowdfunding platforms have investor regulations.

4. Real Estate Investment Trusts

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Real estate investment trusts(REITs) are companies that own commercial properties and allow people to invest by buying stocks of those properties. Essentially, you are able to reap the benefits without fully bearing the risks of owning them. With REITs, the shareholders earn dividends yearly. 

5. Land

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Buying land is no easy task. That type of real estate investment requires a series of market research and a great pool of investment capital. Since acquiring land is a risky investment, it requires a person that has clear knowledge of the market, and building guidelines and regulations.  

So What are the Risks Involved in these Real Estate Investments?

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1. Vacancy Risk: Real estate investments such as commercial and residential properties may not get occupied immediately. The results may be worse if you had taken out a loan to acquire the property. As such, the unstable interest rates may continue to rise and you may end up losing the property. Alternatively, the lack of occupancy on the building may lead to plummeting of the market values of that particular property. 

2. Marker Risks: The unpredictability regarding the property value concerned determines the risk associated with real estate investing. Owing to the distinctive character of each property and the lack of a clearly defined pricing system, property, and its related assets are intrinsically difficult to estimate. Consequently, appraisals are likely to be fraught with risk. There’s a chance that the worth estimations won’t match the final sales price. As a result, a property market downturn might have a significant negative impact on its value.

3. Risks Involving Liquidity: Liquidity refers to the ability to obtain cash from an investment. In real estate, it is hard to turn the investment into cash. Selling or leasing a property is no easy task. Moreover, the final sale may give a negative return on investment due to shifts in market conditions over time.  

4. Legislative Risks: Laws are so far known as the biggest risk of any industry. Regulatory changes may have an impact on the chances for a future tenancy of the properties or future sales. New technological or other property regulations may entail expenditures on the firm or person that are not recoverable from the renters. Applicable tax regulations, as well as the implementation of those rules, may change from time to time. Investors may be confronted with new and varied investment parameters as a result of changes to tax regulations. These rules often threaten to plummet the value and ROI of these properties.

The Bottom Line

Real estate investment is prone to multiple risks. While the investment is lucrative in the long run, it’s advisable to inquire about the risks so that you can determine the degree of risk you are willing to take. 

Investments like crowdfunding may be potentially risky if the platform promises next to zero risks.  Scums and pyramid schemes are also there to prey on the gullible. Understanding these risks puts you in a better position to invest wisely. 

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About the Author: Barry Lachey

Barry Lachey is a Professional Editor at Zobuz. Previously He has also worked for Moxly Sports and Network Resources "Joe Joe." he is a graduate of the Kings College at the University of Thames Valley London. You can reach Barry via email or by phone.