Challenges of Investing in Real Estate

Just like any other investment, real estate also involves risks. From market unpredictability, choosing a bad location, and negative cash flows to high vacancy rates, problematic tenants, and hidden structural costs, various problems can present a challenge while investing in real estate. Understanding the challenges associated with investing in real estate can greatly prepare investors for the different scenarios that may come up during or after their investment. However, the risks associated with real estate investing can be dealt with by properly analysing investment options and carrying out verification of details. Continue reading to understand the challenges associated with investing in real estate and how they can be mitigated.

Real estate can be a tricky investment due to certain challenges. Firstly, market unpredictability is perhaps the greatest challenge of making investments in real estate. Many believe that the market will only move in one direction and assume that buying a property today will always lead to selling it for a higher price in the future. However, an investment could also depreciate due to the unpredictable nature of real estate. Supply, demand, demographics, interest rates, government policies, and unforeseen events can significantly affect real estate trends, prices, and rental rates (Park, 2010). Careful research, due diligence, and monitoring of real estate holdings can significantly reduce this risk. Real estate should never be a sell-it and forget-it investment, rather monitoring investments to adjust entry and exit should always be an important strategy. 

The second challenge in terms of real estate investing is choosing a bad location. Often, the location is the first consideration when buying an investment property. Real estate can be defined as immovable property, which means that it cannot be relocated once a property has been bought. Location drives the factors that determine the ability to make a profit out of an investment. Demand for rental properties, rental rates, and the potential for appreciation are some of the key factors which determine the viability of a location. The best location is that which will drive the highest return on investment. Another challenge of investing in real estate is experiencing a negative cash flow. Cash flow is the money that is left after paying all the expenses on a property. The top reasons for a negative cash flow can be high vacancy rates, high maintenance costs, high financing costs, and not charging enough rent (Peng, 2016).

Furthermore, whether investing in a single-family home or an office building, filling those units with tenants is important to generate rental income. There is always a high risk of vacancy in real estate investing and can become risky if the investor is counting on rental income for the property’s mortgage, insurance, property taxes, maintenance, and the like. Even if tenants are found, there is always the challenge of receiving problem tenants who do not pay on time, trash the property, host extra people, and ignore their tenant responsibilities. Lastly, the most dangerous challenge of investing in real estate comes in the form of hidden structural problems that can be extremely costly to repair and maintain. This often leads to a lack of liquidity, and an investor could end up selling his property for a lot less than its actual value (Evicting a Tenant – Considerations for Landlords).

Although the challenges associated with real estate investing are many, there are ways an investor can mitigate the risks involved. To tackle the unpredictability of real estate, an investor should monitor the market and study past trends to better understand market trends at a given time. Choosing the best location also requires a deep market survey along with getting the services of an expert real estate appraiser. Areas with developmental projects or areas near main city centres often have the highest value due to the availability of civic amenities and urban infrastructure. Picking a location that has similar characteristics can greatly secure the investment. Similarly, to reduce the chances of experiencing a negative cash flow, an investor should deeply analyse the property to calculate the income and expenses that the property will generate. Ensuring due diligence in the early stages can help cut costs later.

The main reason for having a negative cash flow is the underutilisation of the property due to a high vacancy rate. The primary way to avoid the risk of high vacancy is to buy a property having high demand, good location, proper advertising with a targeted audience, proper maintenance, and offering incentives for tenants. Moreover, proper screening of tenants should be carried out before making a contract. Running a credit check and criminal background on every applicant can greatly reduce the risk. This can surface out past red flags such as late payments to the previous landlord, property damage, and eviction. It is also recommended that a landlord should investigate the potential tenant’s work history to determine if they can pay the set rent on time.

A major setback to real estate investment can surface in the form of hidden structural problems in the property. The risks can be lowered by carrying out a thorough inspection of the property using qualified and expert property inspectors, mould inspectors, and pest control specialists. If a problem is discovered, accurate calculation of repair costs can help determine if the property will remain profitable after investment. Lastly, to reduce the challenge of real estate liquidity, there is always the option to tap into a property’s equity for cash. It can also be used to finance a further mortgage or cash-out refinancing. Real estate has always been considered a sound investment as it provides a passive income, tax advantages, diversification, and opportunity to build wealth. Limiting the risk on investment by carrying out due diligence and conducting a thorough real estate market analysis can make all the difference towards a secure real estate investment.

Understanding the challenges associated with investing in real estate is important for investors. These challenges can be easily overcome by conducting a thorough analysis of the investment beforehand. Supply, demand, demographics, interest rates, government policies, and unforeseen events can significantly affect real estate trends, prices, and rental rates. Therefore, real estate should never be a buy-it and forget-it investment. Instead, it requires due diligence on the part of the investor and deep market insights to generate a profit on the investment.

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Lordo, A., & Kinsman, C. M. (2010). Owner-Occupied Commercial Real Estate for the Entrepreneur. Retrieved 7 14, 2021, from https://gbr.pepperdine.edu/2010/08/owner-occupied-commercial-real-estate-for-the-entrepreneur

Park, A. (2010). Private vs. Public Real Estate Markets. Retrieved 7 14, 2021, from https://gbr.pepperdine.edu/2010/08/private-vs-public-real-estate-markets

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