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Real Estate Investing Risks

Common Real Estate Investment Risks

All investments carry a degree of associated risk. The term risk can be defined as the likelihood of loss on an investment when it comes to expected returns. Risk is something all investors face. Understanding risk in the real estate industry requires the investor to quantify certain metrics that are not easily quantifiable. If you are looking to invest directly into a property or fund larger real estate investments, there are three common risks to consider:

  • Risk of not getting what you paid for
  • Risk of bad or no tenants
  • Risk of fluctuation or decline in the housing market

Doing your homework in a real estate investment is a must. If you don’t gather the right information, or simply not enough of it, you run the risk of facing unfavorable surprises, financial and physical. If you’re investing in a rental property and are not aware of foundation damage, this could hurt your investment. Similarly, if you don’t do your homework on a fund prior to investing, you could miss crucial information relating to the fund's yield and dividends. On another note, bad tenants at the end of the day negatively affect cash flow and financial security. Some would argue that the biggest risk all when investing is in real estate is the health and state of the housing market. In the event of a housing market crash, all real estate investments face loss.

Common risks aside, there are more detailed risks associated with specific types of real estate. The following section will explore the varying levels of risk associated with the major types of real estate transactions.

Risks Associated with Different Types of Real Estate Investments

  • Homeownership: There is always risk of default with a home ownership investment. People tend to invest in a home before they pursue a career in real estate or acquire additional real estate investments. For this reason, lack of experience in an initial investment can result in financial woes. Similarly, any event that would warrant the inability to make mortgage payments could ruin an investor’s credit and lead to loss of property by the bank in a foreclosure. Another risk is that the property could lose value over time, especially if no updates are made to increase its value. Often, you will see homeowners that haven’t made updates to a property, at selling time, forced to reduce the list price.

  • Private Equity Risks: Risk associated with private equity investments, especially in the distressed property sector of the real estate industry, stems from not being able to renovate and sell the property in a timely fashion. Often, in a private equity investment for a distressed property, you’ll see unforeseen issues sprout up along the way, from construction, to building code violations, to finance issues etc. When this happens, investors may have to extend their estimated time of completion which can cause the property to sit on the market longer. The longer a property sits on the market, the less take home profit the investor can take home. Even if renovations go according to plan, if there are no interested buyers, the property will still sit on the market ultimately costing the investor more and more.

  • REIT Risks: REITs are publicly traded, so volatility risk plays a role with the selling and buying of shares of REIT stock. More often with REITs you will see drops in real estate prices, and this causes a REIT to underperform. When real estate prices drop and prime rate interest rates rise, REITs have a tendency to produce negative total returns.

  • Crowdfunding Risks: Risks of crowdfunding mostly center on rises and declines of the housing market. Keep in mind, if there is a housing market crash, all real estate investments will take a hit, not just crowdfunding investments.

  • Home Equity & Line of Credit Risks: The biggest risk in a home equity loan or line of credit is ease of spending. This can lead to default. At the end of the day, available capital is easy to spend. In both a home equity loan and line of credit, payments are low and credit levels are high. In the event of default, the borrower’s home may be foreclosed on by the bank and significant credit damage may ensue.

  • Commercial Loan Risks: A major risk associated with commercial loans is that they require a lot of start-up capital at the time of purchase. Loss or lack of tenants, for instance in the event of a recession, can drastically impact the expected return of a commercial property investment. The major risk in commercial property is little to no produced income.

In Summary

All investments require a degree of risk. While some consider real estate investments to be a safer option, an investor must do research and find out as much as they can about a property or deal prior to executing an investment. An investor also must understand the state of the housing market. In the event of a crash a real estate investment would not result in a total loss, but it could warrant severe financial consequences. The most important steps in any real estate investment are: do your homework, choose a good location, and aim for a good time to purchase when the market is healthy and demand is relatively high. If you are preparing for your next real estate investment, CityVest can help, contact us today for more information on available crowdfunding deals and associated risk.

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  • A completely new alternative to investing in stocks and bonds.

    Every CityVest investment undergoes a thorough due diligence process by our experienced underwriting team. Of the hundreds of projects reviewed each month, fewer than 1% are approved.

    CityVest can help you:

    • EARN PASSIVE RETURNS OF 10% TO 25%

      You benefit through professional investment structures, which target passive returns for our investors in a range from 10% to 25% - often with a preferred return.

    • ACCESS INSTITUTIONAL QUALITY FUNDS

      CityVest pre-screens investments for you through our underwriting and due diligence process. We partner with institutional investment funds and sponsors and we seek a preferred rate of return.

    • PORTFOLIO DIVERSIFICATION

      Since real estate investments typically generate cash flow income, while common stock does not, real estate valuations tend to be less volatile and less sensitive to market risk factors.

    • COMPLETE INVESTMENT MONITORING

      CityVest will handle all of the accounting and administration of your investment, while you can monitor the returns.

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