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Risks To Keep In Mind When Investing In Real Estate

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Real estate is often considered one of the safest investments a person can make. This is because mortgages are more often than not kept up with, and homes are stable assets that rarely encounter massive depreciation in value unless an external force causes untold damage. In fact, it’s this understanding that the housing market is reliable is exactly the fundamental cause of banks selling toxic assets to investors pre-2008, leading to the incredible market crash that took place.

As with all investments, there is always a risk no matter how you choose to move forward. That being said, risk can always be managed. Additionally, it can be assessed before deciding on your pursuit. If purchasing a property abroad, or a second property you may wish to utilize for personal reasons, it’s still worth keeping this in mind. For that reason, we have acquired and curated some of the following advice to help you out. Feel free to refer to this generalized wisdom should you find yourself in the starting stages of an approach like this – you never know how far you could go, no matter if pursuing a house for sale or expanding your offices.

Asset-Level

It’s important to consider the particular definition of your real estate investment plan and thus the risks that may be part of it. This is related to how the real estate is classified. For instance, real estate that makes best use of tourism trends is always at risk of societal and cultural movements. Consider how the coronavirus is currently causing real estate property to struggle with its regular income cycles. This in itself can be a problem, especially if your business is situated and also commercially located to make use of these trends.

However, residential real estate is often considered quite stable, although subject to market trends and investments and migration patterns in the local environment. For this reason, those natural variables must be mapped, understood, and referenced against the last ten to fifteen years of property value. Offices are usually much less impacted by the movement of consumer trends than public-facing commercial real estate. Considering your asset-level risks will help you identify broad stroke considerations that may encourage or dissuade an investment ahead of time.

Idiosyncratic

Idiosyncratic definitions take into account the actual value of the property itself. Each real estate node that you invest in will be subject to differing risks depending on location, surroundings, construction, value, maintenance and management. This is just to list a few of those variables.

For instance, which is investment opportunity is riskier? Investing in offices in the middle of England, or in buildings across the San Andreas fault line? We wouldn’t insult your intelligence with an answer, although of course even glaring issues like this do not predict the whole story, nor should be taken as outright gospel. After all, the office building in the middle of England may be located within a protected area of outstanding beauty, meaning that your expansion plans are all but nullified unless you research and understand the permit allowances ahead of time.

Certain idiosyncratic risks are related to the setup and potential income stream your property may need to suspend as a result of construction. For instance, it’s hard to ensure rents are collected when deep maintenance is gutting the building and preparing it for a new unveil. Additionally, matters such as corporate gentrification can turn neighborhoods into areas where the local residents are pushed out, and development or investment raises the local housing prices. At the residential level this can be a tragedy, but for those with money, this could be an opportunity. That being said, reputational risk could also be on the line here. When you begin thinking like this, you can more accurately predict the measures you need to take care of before things really start working in your favor.

Future Costs

Of course, an investment opportunity that seems fantastic now may not work so well for the future, and may even be a liquidity risk for your company. Consider how Jared Kushner’s Kushner Properties purchased 666 Fifth Avenue in New York, a very prestigious building in which they had hoped to expand their influence from and stand tall as a fixture within some of the most prized real estate in Manhattan.

It turned out that the property cost of keeping this enterprise afloat was a dramatically difficult pursuit, and not only this, but the 2008 housing crisis caused untold damage to the valuation of their property, not to mention their affability with the property market. This is a specialized example, and it’s unlikely that your business will invest in anything quite so luxurious (as of the moment of course, we wish you luck in your future endeavors). However, it goes to show that even thoroughly accomplished firms can also miss out on the essential risk-management considerations and still go ahead with the acquisition of a burden that weights down a firm for some time.

Purpose

What purpose do you have for the real estate you are investing in? Growth of your offices? What other alternate options exist? A means in which to diversify your investment portfolio? Isn’t this a tenuous means in which to get into the property market? The more your firm can play devil’s advocate with itself, the longer you’ll be able to ensure a better and more directed investment without relying on well-wishing or hope to get you through. After all:

Unforeseen Events

Who would have expected Coronavirus? Who would have predicted difficult weather conditions? What if market capitalizations change due to import tariffs or trade wars that take place overseas? Are the thorough considerations of Brexit even known by firms ahead of time? Of course, the answer is no. It’s hard to predict the unpredictable, but it’s worth being wary of and securing backup plans to seek comfort in the chaos. Even the seemingly most stable investment category of real estate can be subject to the tides of change, so never be afraid to conduct extensive research with these possibilities in the back of your mind.

With this advice, we hope you and your firm can keep the essential risks in mind when investing in real estate.

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