Real estate investing can be profitable if you know what you’re doing. However, like any other investment option, it carries some risk. That’s because real estate markets fluctuate, and when they do so unpredictably, the value of your investment can plummet quickly. Given this inherent volatility, it makes sense to avoid certain risky real estate investments as much as possible. Here we’ll discuss some common real estate investment risks and how to avoid them when purchasing rental properties or other types of real estate as an investment.
Real Estate Investments to Avoid
It’s important to be aware of certain real estate investment pitfalls so that you can avoid them. For example, real estate purchases that are primarily focused on generating short-term profit are often extremely risky. While it’s possible for a short-term real estate investment to generate a high return; it’s also possible for such an investment to lose all of its value within a short period.
Understand the Market Before You Invest
Before you decide to buy a rental property as an investment, you should understand the local market from a general perspective. For example, you should know the following general market figures for your area:
- What percentage of your area’s residents own their own homes?
- What kind of average income do homeowners in your area earn?
- What percentage of your area’s residents are currently renting?
There are numerous sources that you can tap into for information about the local real estate market such as real estate agents, online real estate forums, and local newspapers. While it’s not always possible to know the specific details of your real estate market before you invest, you can get a good general idea of your area’s current real estate market conditions.
Don’t Pay too Much for Properties
New real estate investors make one of the biggest mistakes: paying too much for their properties. You can go about learning the current market value of a property in one of two ways: look up the current estimated value on the internet or you can contact a real estate agent and ask them what the market value is for that property. A good rule of thumb is that you should pay no more than 10% above the current market value.
Real Estate Investments that are Risky at Any Price
Some real estate investments are just plain risky at any price. These types of investments are usually owned by professional real estate investors who buy up large quantities of real estate and then sell it as rentals. It’s often very difficult to know what future market conditions will be like, so it’s very difficult to predict how much money you’ll make over the long term. Professional real estate investors are often only concerned with making a quick profit. This means that they are willing to buy any type of property, including properties that have a high risk of declining in value. This type of short-term thinking can make it difficult for you to determine when it’s time to exit your long-term real estate investment.
Conclusion
Real estate investing is a complex and potentially profitable business. However, all the hard work and profit can be lost if you make one mistake. Here are some of the ways that inexperienced real estate investors can lose money: Not understanding the real estate market’s volatility and risk. Not understanding the value of the time it takes to find a good investment. Not understanding when it is time to exit their investment. Real estate is a complex business that requires a great deal of knowledge, patience, and time. Real estate investing is better with a trusted advisor like Instant Equity Investing at your side, guiding you every step of the way.
Click here for our complete Guide to Passive, Hands-Free Real Estate Investing.
