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Common Risk Involved in Real Estate Investments

How to Avoid these Real Estate Investment Pitfalls

You often hear it said that real estate investments are a ‘sure thing’ because you are investing in brick and mortar (i.e., not something that will go away). However, many a successful real estate investor will tell you that you can indeed lose your shirt in this business if you don’t know what you’re doing!

So to aid you, do read on and discover several types of real estate investing styles and their pros and cons.

Renting Out Real Estate

The main risk with this type of property investment is that you may not see good returns on your money. For instance, if your property does not pull in enough monthly income from rent to cover at least your mortgage payments on the property, then you’re losing on this investment rather than gaining.

Another real-life risk: less-than-desirable renters or tenants. Unpleasant renters may mean that you cannot rely on the monthly income from your property. It may also mean that they are not good at maintaining your property, which can lead to costly property repairs for you. This situation can be very difficult for you if you’re a first-time real estate investor as you will most likely be relying a lot on those monthly rental fees to tide things from one month to the other.

The advantage of rental properties though is that you maintain ownership of the property.

It’s like having others (your renters) pay for your mortgage payments. When the time comes that the real estate market reaches a peak, you can sell then and make great profits.

Flipping Properties

Flipping properties is when you buy real estate, do it up (renovate), and sell it on for big profits. The process of flipping a property can be fun but there are big risks to this type of property investment too.

For instance, if you purchase the property at a high price, you may not have enough money to renovate the place to a high standard. And if you cannot do that, you cannot sell it for a high price either.

Another risk is not being fully aware of structural changes that may need to occur on the property. For instance, you may have budgeted for new flooring but what if further inspection reveals that you need to completely re-wire the place too? This can cause a big dent in your budget.

The advantage to flipping though is that if you do things right, you can earn A LOT in a very short span of time. Although the amount of changes and repairs obviously depend on the condition of the property, flipping is usually accomplished within just weeks or a few months after purchasing the property.

Looking at Your Home as a Real Estate Investment

Although you live in your home, if you think about it, it is a real estate investment. Oftentimes, homes increase in value and the equity you build into your home is of course a profit if and when you sell your home.

The risk here is if your house is located in an already ‘stable location’ and you purchased during its peak. This means that the area has already reached its high point and so you may end up losing when you sell your house later on. Another risk is if you took a mortgage type that is not beneficial at the moment, like an adjustable rate mortgage.

Real estate investing can be a very lucrative business. Know the different types, assess the market and make informed decisions before you jump in.