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challenges of real estate investment

What are the challenges of real estate investment

Real estate investment seems pretty simple and straightforward: you buy a property and either rent it out to obtain a steady stream of cash flows over the years or sell it for profit. If handled correctly, real estate provides a low-volatility investment where the value of the underlying asset gives security to the investor in the long-run and can also provide short-term earnings through cash flows from rent.

Additionally, it does not require high upfront costs for investors, as they can take out a mortgage loan to leverage the cost. Therefore, owners can take control of the asset and start earning cash flows with little invested capital.

BUT… If one does not make a smart investment or weigh the potential risks, this could end up with a potential loss of the investment or even having other personal assets unrelated to the investment taken away to cover loan deficiencies. How can one make sure to invest correctly in order to benefit from these advantages?

Measure the risk you’re willing to take

Did you know that you can invest during any of the phases of a construction project? For example, you can invest in a project whether still in blueprints or newly finished, or you can even invest in an older property and “flip it.”

While investing in a development that starts from scratch tends to be cheaper, it also involves a higher risk, since you can’t be certain of the final result and will have to trust the constructor to fulfill its promise and deliver the project as it was outlined.

There is a risk that the constructors will take the money and never deliver the project. Make sure you check out the construction firm and previous developments they have worked on.

Read also: 8 investment opportunities to boost your finances

On the other hand, buying a finished property is more expensive. But at the same time, the degree of risk is lower because the final product is already delivered and you can evaluate if it’s up to your standards before investing.

Finally, flipping homes is riskier, since it requires additional investment and skills to make repairs and improvements to the property. Owners have to try to do the repairs with as little an investment as possible because everything spent on repairs cuts away from their potential earnings. Hiring a contractor to do the work chips away from the profits even more.

For these reasons, flipping a property can be time consuming and require a lot of attention, demanding constant visits to the property to oversee or perform the repairs. And because the goal is to try to make the sale as soon as possible, every day the house isn’t sold means you are losing money, which you’ll have to recover with the sale in order to break-even and make the investment worth it.

Make wise investments

Try to invest in areas that are going to gain value. Factors such as governmental or private investment in the area, high population density, good school systems, or local job growth can increase the value of a property over time.

On the other hand, negative factors such as insecurity, reduced government support, contamination, excess real estate supply, and others can lower the value of a real estate investment. Try to project what the future may be in the geographic area where you are seeking to invest.

Some simple techniques you can use for this are:

  • Drive around the neighborhoods you are considering to get the feel of the place. Are the public spaces such as roads and parks in good condition? Do the houses look well-maintained? Are there services like post offices, grocery stores, and pharmacies nearby?
  • Research the areas you are potentially interested in to figure out if there are any government works planned for the future, such as nearby highways, schools, and hospitals, which could add value to the location.
  • You can even seek the help of an experienced real estate agent for best advice on the flourishing areas of your city.

Calculate the return on your investment

In order to finance a piece of property, most people need to get a loan, which in turn charges monthly interests. The challenge to make the investment profitable lies in being able to pay the monthly interest charges with the rent generated by the property and still have some cash flow left to earn a profit.

Some things that can help achieve this are:

  • Trying to finance as much as possible with your personal savings to reduce the loan principal amount and therefore the monthly interest costs
  • Paying down your principal amount as quickly as possible
  • Finding a mortgage that best suits your needs and has a low interest rate

Know your taxes

Property taxes can be pretty steep depending on the neighborhood’s exclusivity, services offered, and the land’s potential to be exploited. Weigh the taxes vs. your return.

Yes, owning real estate can be costly but it can also generate tax benefits such as deductions from depreciation or interest expense. Try to benefit as much as possible from these tax breaks.

Choose your tenants wisely

If you decide to rent your property, your ability to make monthly payments towards your loan’s interest relies on the payments you receive from your tenants. Choose tenants who can provide you with positive references from work or previous landlords, who are credit-worthy and provide guarantees of payment.

Also, try to reduce the time your property is unoccupied as much as possible, since it’s not being profitable. Keep in mind that if for some reason you can’t fulfill your interest payments, the lender may foreclose and/or recover their losses from your personal assets.

This said, you must always research your tenants as much as possible and not commit to a possible candidate unless you are 100% convinced.  

Analize other types of real estate investments

Not all real estate investments need to be conducted by purchasing a property directly. People can also invest in development projects managed by others.

For example, options such as real estate investment trusts (REITS) provide investors with the opportunity to invest in a single property or a fund with a team of professionals with expertise in the industry who manage the properties and deal with leases, maintenance, operations and more.

However, these investments usually have a lower return as part of the fee is charged by the fund.

Is it for you?

Every type of investor should choose their investment according to their lifestyle and level of risk aversion. Try finding the investment that best suits your needs and be well advised in every decision.

If you don’t know where to start, what neighborhood to look into, or whether you’re looking at the right financing options, don’t be afraid to contact professionals such as real-estate agents or accountants who can help you with doubts you may have.

Owning real estate can be very rewarding and profitable if you keep in mind all the factors that influence the investment. We’ve mentioned some of them in this article, so try to make wise investments that consider everything mentioned.

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