Top 8 Risks of Invest in Real Estate
Top 8 Risks of Invest in Real Estate
In Pakistan, real estate is one of the best places to get a good return on your investment (ROI). In Pakistan, home prices have increased by 59.37% in the last five years, from PKR 5,218 per square foot to PKR 8,316 per square foot. Because prices will rise, real estate is one of the safest places to spend money. But there are some risks to invest in real estate that investors need to be aware of if they want to protect their money and make the most money possible.
The most innovative online real estate site in Pakistan, Advium Real Estate Agency, looks at these risks in Pakistan in detail.
Why spend money on the property?
When many other markets increase, you might wonder why you should invest in real estate. Here are some of the reasons why you should think about it:
Real estate is one of the safest places to put your money. Even when COVID-19 was in effect, the sector grew because the government made tax breaks available.
Unlike other industries, real estate can grow in value on its own. This is done by giving the renters better amenities. If a builder wants to compete and offers better facilities than others, they can charge more than the market price.
Good investors know they should only put some of their eggs in one basket. Real estate is an excellent way to diversify a portfolio because it rarely decreases in value.
Real estate is linked to many other industries, so governments often use tax breaks to help the sector grow.
Banks will invest in your projects if you have a clean record and a good plan for an investment in real estate.
You can touch real estate, and one of the easiest things to pass down to your children and grandchildren.
Even if you decide not to use real estate as your primary source of income, you can still invest in getting a passive income.
Stock image showing location of property
The location of a property should always be the first thing you think about when you want to buy it. After all, you can’t move a house to a better neighborhood or carry a store out of an empty strip mall.
Ultimately, your ability to make money depends on where you live. This includes the demand for rental properties, the types of properties most in the direction, the tenant pool, rental rates, and the chance that the property will increase in value.
In general, the best location is the one that will give you the most money back (ROI). But it’s best to research the best sites that provide the best return.
Risk of supply
Supply and demand risk is a part of investing in real estate.
Since real estate can’t be moved, supply and demand have a more considerable effect. Consumers move from one market to another when prices change because of these forces.
Like in any other market, a considerable increase in the number of properties for sale can put the current prices at risk. This can happen directly when an increase in supply makes the price stay more or less the same or indirectly. When new units need to absorbed by the market or sit empty for a while before the cost can rise again.
People often invest in real estate because it gives them a steady source of income. But there is always a risk with this source of income because the landlord is vulnerable to tenant credit risk, which could cause cash flow gaps due to unplanned downtime or vacancy. A big part of the real estate risks that could hurt your income is, in fact, rental risk.
Lack of cash flow
Cash flow is a risk when investing in real estate.
Cash flows are the money left over from an investment in real estate after all costs, taxes, insurance, and mortgage payments have been make. When the money coming in is less than the money going out, you have a negative cash flow, which means you are losing money.
Negative cash flows can brought on by some things, such as:
- The house is empty for long periods.
- Underestimating the cost of repairs
- Taking out high-interest loans for building projects
- Renting out the property for less
Doing research before you buy is the best way to lessen the chance of a negative cash flow. Take the time to accurately (and realistically) figure out your expected income and expenses, and research to ensure the property is in a good area.
Lack of Cash Flow
If you own stocks or bonds, selling them is easy when you need or want to cash out. But that’s only sometimes true when investing in real estate. If you need to sell your home quickly, you might have to sell it for less than the market value or even lose money.
There is little you can do to lessen this risk, but if you need money, you can use the equity in your home. For example, you can get a home equity loan (for residential rental properties). A cash-out refinance, or a commercial equity loan or equity line of credit (for commercial properties).
Structural Soundness of the Building
A sure way to lose money on an investment is to underestimate the cost of repairs and maintenance. Fixing the structure of a commercial building or getting rid of mold or asbestos could easily cost tens of thousands of rupees.
However, you can reduce this risk if you carefully check the property before buying it. Hire a qualified and trustworthy property inspector, contractor, mold inspector, and pest control specialist to “look under the bonnet” and find hidden problems. If a problem is found, you should find out how much it will cost to fix it and either include it in your agreement or back out if it will keep you from making a good profit.
Taxes on property
There are some taxes that investors in real estate must pay. Some examples are the tax on capital gains, income tax, and property tax.
Because there are many different taxes, one may change while making the investment. For example, property taxes may vary throughout the investment’s life, which could be harmful. Investors should be aware of changes to tax laws and make plans based on those changes.
How to Find Good Tenants
Your investment properties should rented out as much as possible to avoid vacancy risk. But this can lead to a new threat: tenants who are hard to deal with. A bad tenant can cost you more money and cause you more trouble than having no tenant. People who are having trouble as renters include:
Getting kicked out could lengthy and expensive if you pay late or don’t pay at all.
Maintenance problems should have been reported more quickly
Even though it’s hard to avoid altogether having a renter who causes trouble. You can reduce the risk by doing a thorough job of tenant screening. Check the credit history and criminal history of every applicant. Check with each applicant’s previous landlords to see if there are any red flags. Such as late payments, damage to the property, or being kicked out.
You can lower your risks by doing your homework and thoroughly studying the real estate market and rental properties. Hire experts to look at the property, check out potential renters, and teach you about the real estate market.
Remember that there are many ways to invest in real estate without owning, financing, or running the properties themselves. Some options include real estate investment trusts (REITs), real estate stocks, real estate crowdfunding, and real estate partnerships.
Think of learning something new or getting a new license as an investment in yourself. For example, many people who invest in real estate get license as agents or brokers to take advantage of things like the Multiple Listing Service (MLS), networking, and commissions from sales and rentals.
The market always has risks, and investors must consider them before making financial decisions. The OADD (Ownership, Approval, Demand, and Delivery) process allows investors to determine these risks’ significance. Investors can check to see if the property’s ownership is not being questioned in any court of law and if it has the correct permits. Lastly, investors can look into how much interest there is in the project. And how the owners plan to make the promised return on investment.