Five Risks to Consider Before Investing in Real Estate04 February 2014
Here are five of the most common risks associated with investing in real estate:
- House Price Risk (up or down): what if the house goes down in value? That's why it's important to evaluate mortgage, cash flow and debt planning strategies that won't put you in a bind if house prices stagnate or go down a little bit. On the other hand, what if the house goes up in value and you haven’t pulled the trigger yet? That's why it's important to get yourself a solid mortgage approval BEFORE you go house shopping, and be prepared to act quickly if you find what you're looking for.
- Carrying Costs: if you’re fixing and flipping, have you factored in the costs of carrying the mortgage, and paying the property taxes, utilities and other expenses on the home?
- High Costs of Sale (8% +): do you realize that you’d have to sell the house for at least 8% - 10% more than what you paid for it just to break even and cover the real estate commissions and transfer taxes? That's why it's important to make sure that buying this property is part of a longer-term investment strategy.
- Vacancy Risk & Eviction Costs: what if the tenant defaults on the rent and you have to hire a lawyer or go through a costly eviction process? Or, what if you can’t find a tenant? That's why it's important to consider risk reduction techniques like non-refundable deposits, sale/leasebacks and/or rent-to-own strategies.
- Lack of Liquidity: what if you need access to your capital and you can’t sell the house? That's why you should never be 100% invested in real estate. This means that if your budget for real estate investments is $200,000, you should keep part of that cash in the bank, sitting on the sidelines. This way you won’t get into trouble if the property sits vacant for a few months. Also, a cash cushion allows you to quickly take advantage of other investment opportunities when they arise.
A Certified Mortgage Planning Specialist can help you mitigate some of these risks, calculate your internal rate of return and compare your options. Click here to find a CMPS professional in your area.