Real Estate Investment: Understanding the Risks Involved
Real estate investment provides you with the opportunity to earn passive income, especially in the long-term. However, you need to be aware of the fact that investing in real estate comes with risks. Underline this fact because often, when brokers and real estate firms come to you, they may want to paint a risk-free picture of their projects. Understanding some of the risks involved can help you make better investment decisions.
Some of the risks to consider include:
Market decline
The real estate market is subject to inflation and other economic instability. Market fluctuations can affect your investment especially if you were hoping for immediate returns. To deal with market fluctuations and price stagnation, invest in property that will bring in decent cash flow even when the market is unstable.
Poor location
Buying real estate in a bad location is one of the biggest risks you can take. A bad location means a place where growth is extremely slow and the economy is poor. In such a location, your investment will not grow and you will have spent money that will remain dormant for probably a long time to come.
Before you invest in a piece of property, carry out extensive research on its viability. Look at an area’s projected growth in terms of population, jobs and amenities.
Leverage
Taking up a real estate investment in Kenya most often requires a lot of money. This means that you may need to seek financial assistance from an outside source. Taking a loan is one of the common ways to finance your investment. Leverage is the amount of money you have borrowed to finance your investment in comparison to the property’s worth. Leverage can be a huge risk to you, in the unfortunate event that you fail to make loan payments.
Borrowing money to invest in real estate requires that you have sufficient cash flow to cover payments. Otherwise your lender may repossess the property if you are unable to repay your loan.
In conclusion
Risks in real estate can be related to the overall economy, be specific to the real estate market or to the specific project. While all investments are prone to risks, it is important to conduct your due diligence to ensure that the returns will be worth the risk.
You can mitigate some of the risks involved by doing what is in your ability to reduce the risks. You can choose the right location, understand the terms provided by the project sponsor and ensure that you only take loans that you can comfortably pay back.