Risks involved in Real Estate Investment

Sujan Afi S

Any kind of investment is associated with some risks. Investment in real estate is not out of it. Although many investors consider investing in real estate to have considerably low risk, still there are many kinds of risks associated with the real estate investment. If the risks are not considered seriously then you might face significant financial loss.

In a country like India where we spend almost our entire savings on buying a property, financial loss in buying a property is havoc. Thus, we should try to be very careful while investing. Though experience is the best teacher, still we have tried to point out some of the risks that are associated with real estate investment. We hope that the blog helps you!

Types of Risks Associated With Real Estate Investment

The risks that are associated with real estate investment are discussed below in detail

  1. Financial risk due to debt: The real estate investor often takes on debts while buying a property. But receiving debt from various financial agencies for the purpose of investment increases the risk of investment both for commercial as well as residential real estate properties. The interest rates vary with time. This increases the risk of real estate investment. If you fail to pay the interest amount then it adds to your total amount to be paid. Also, failure of paying the principal amount on due dates might turn out to be problematic in future. 
  2. Liquidity risk: It is quite difficult to sell a real estate property after buying it and therefore you may face the problem of liquidity risk in real estate investment. Finding an appropriate buyer who is ready to give you the desired amount you want is quite difficult!
  3. Management risk: After buying a real estate property you are required to manage this property very well to maintain its overall status. The management of real estate property is not so easy. You might require to recruit one person or do it yourself. If the property is not managed properly then you might face financial losses while selling it. Why? Because the buyer might ask you to repair the damages or you might need to renovate your property.
  4. Tenant management risk: If you allow tenants in your real estate property then you should manage the tenants very well. Some of the tenants don’t take proper care of the house they live in. There is a general thought in the minds of the tenants: “This is not our house. Why should we care?” 
  5. Legal risk: You should investigate well the legal documents of the real estate property before investment. If there are any legal disputes over the property then it will cause you significant financial loss. There are examples when the buyer had to leave the property too! Thus, hire a legal advisor if you face any difficulty in understanding the legal terms and conditions. 
  6. Unpredictability nature of the market: The real estate market is quite unpredictable and if you wrongly predict the market situation then it will lead you to severe financial loss.
  7. Locational risk: Carefully investigate the location of the property. Because in real estate the location is a very important factor to determine the overall price of a property. Therefore, if you wrongly calculate the locational importance of a real estate property then be ready for financial loss for your investment. Why? Because a house located in a place where the amenities and services are poor will not have prospective buyers later on. You might also face difficulty in living there. Will you live in a house around which there are no medical stores or markets? 
  8. Negative cash flow risk: Negative cash flow happens when you require to spend more money on the property (after the investment) than generating income from it. The negative cash flow occurs for several reasons, like – high vacancy rate, too costly maintenance, low rental charge, etc.
  9. The hidden structural problem of the property: You should visit the house before you invest otherwise hidden structural fault may increase your risk of financial losses!
  10. Depreciation risk: If the property value depreciates then it will cause financial loss.

In a Light of All These Facts

The above discussion indicates that there are several risks in real estate investment. But if the precautions are taken then these can be reduced significantly. All you need to do is to investigate the property minutely before going to invest. If the investment is done very carefully then these risks can be reduced successfully and you can earn high profits in future! 

We hope that the blog has helped you in some way to understand the risks involved in real estate investment. Nevertheless, if you have any doubts or suggestions, you can reach out to us via our mail id. Your concerns will be addressed and your suggestions will be valued. So, why are you waiting? Mail us now and let’s build a beautiful community thus!  


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