10 Major Risks of Real Estate Investing and How to Reduce Them (2023)

Real estate investing is one of the best ways to make money and build wealth, no one can deny that. There are many benefits of buying and owning investment properties and earning passive rental income. However, although owning a rental property is a relatively safe investment, not every property investor can achieve guaranteed success in this competitive market.

Just like any other type of investing, there are a few risks associated with real estate investing which the property investor (whether an experienced or a new investor) should be aware of and know how to avoid in order to find the best rental property and succeed in the business.

So, without further ado, here are 10 major risks of real estate investing and how to avoid them:

Real Estate Investing Risk #1: Unpredictability of the Real Estate Market

The real estate market has been growing quite well in the past few years; however, there is no guarantee that this positive trend will continue. The real estate market is known for its ups and downs with the ever-changing economic conditions. In real estate investing, the economy plays a major role in the value of an investment property. Therefore, there is no guarantee that you’ll be making a profit when you decide to sell an investment property.

For example, if you buy investment properties during a time when demand is high for real estate investing, you might be at the risk of selling them for lower than the initial purchase price (even if this property generated profit through rental income) because its value has gone down as the housing market changes. This might cost you more money than what you’ve earned while renting out the property.

For this reason, when entering the real estate investing business, real estate investors should always be aware of this dynamic, understand and stay up-to-date with the market economy and how it functions, and prepare ahead of time to be able to forecast any real estate market downturns. This will help them determine whether or not buying an investment property at a certain time is a good investment decision.

Related: What Are the Expected Real Estate Trends in the US Housing Market for 2018?

Real Estate Investing Risk #2: Bad Locations

In real estate investing, location is everything! Expert real estate investors agree that when you’re buying any type of investment properties, the location should always be the top factor totake into consideration. How can location be a risk in real estate investing? There are several ways in which investing in a bad location will lead to a failed real estate investment.

First, location determines the supply and demand. You might think a certain location is a good choice for real estate investing due to lower prices. However, these locations can sometimes have too many investment properties available and yet not have a growing population or a good job market. Thus, investing in these locations will cause real estate investors great risks.

(Video) Top 8 Real Estate Investing Risks and How To Avoid Them

Moreover, the property investor should avoid locations that have a relatively higher crime rate. On the one hand, these areas have lower prices and high occupancy rate because people tend to rent instead of buy homes. Meanwhile, when investing in high crime areas, the property investor might face the risk of getting vandalized or robbed, which would lead to unexpected expenses and high repairs costs, not to mention the complications of legal matters as a result of these acts.

Furthermore, in real estate investing, location determines appreciation. Low appreciation means negative return on investment when the property investor decides to sell an investment property. Thus, never buy investment properties based on price alone!

The best way to avoid this risk is for real estate investors to be careful when choosing the location for real estate investing. While it might be tempting to purchase a cheap investment property, in most cases the risk is not worth it.

Click here to start searching for the best locations to invest in!

Real Estate Investing Risk #3: Negative Cash Flow

In real estate investing, the cash flow of investment propertiesis the amount of profit that the property investor earns after paying off all expenses, taxes, and mortgage payments. The next risk associated with real estate investing is the possibility of generating a negative cash flow instead of a positive one. This means that expenses, taxes, and mortgage payments are all higher than the rental income, which results in losing money.

The risk of negative cash flow occurs when the property investor buys investment properties without conducting a real estate market analysis first. Thus, the best way to avoid this risk is by accurately calculating your income and expenses (how much the rental income will be and how much you need to spend on the property) before buying an investment property, and ensure that the rental property is located in a prime location that yields positive cash flow to guarantee a high return on investment.

It is very important to be as thorough as possible because, in real estate investing, even the smallest expenses might add up in the long run. Use Mashvisor’s rental property calculator to easily compute cash flow and rental income of the rental property based on monthly expenses.

Real Estate Investing Risk #4: Vacancy Risks

Buying an investment property does not automatically guarantee 100% occupancy and quick profits. In real estate investing, there is the possibility ofhigh vacancy,which is a major risk to real estate investors’ rental income as it can yield negative cash flow. Moreover, since tenants are the source of rental income in real estate investing, vacancy is a huge risk for real estate investors who rely on rental income to pay off their mortgage, insurance, property taxes, and other expenses.

To avoid the risk of high vacancy, real estate investors should purchase investment properties in a good location with high demand. These locations are typically safe neighborhoods with nearby amenities such as transportation, shopping malls, and schools. Mashvisor allows you to check out vacancy rates for investment properties in different neighborhoods around the US!

Related: 7 Tips to Avoid a High Rental Vacancy Rate

(Video) How to invest in real estate to avoid these 7 major risks. | by Angela Andronache

Real Estate Investing Risk #5: Bad Tenants

Obviously, getting tenants is a necessity for making money in real estate investing. However, getting just any tenant won’t guarantee profitability. The risk of having a bad tenant and getting stuck with him/her could be even worse than the risk of not having a tenant at all.

True, not having tenants means not gaining any rental income. However, bad tenants might refuse to pay the rent for several months in a row, or even destroy the property too much, meaning you will risk dealing with evictions – which are pretty costly and time-consuming.

To avoid the risk of having bad tenants, go through the process of selecting good quality tenants carefully. Conduct a thorough tenant screening process, check their credit score, and ask them for contact information of their previous landlord.

Real Estate Investing Risk #6: Hidden Structural Problems

In real estate investing, a property investor might end up buying an investment property with serious hidden structural problems, which increases the chances of facing unexpected repairs and maintenance costs.

To avoid this risk, get a good evaluation of the state of an investment property and ahome appraisalbefore you even buy the rental property. Property appraisers are professionals who will be able to discover any hidden damages or problems that need fixing; in addition, they will tell you exactly how much your potential investment property is worth.

Real Estate Investing Risk #7: Lack of Liquidity

Liquidity is the ability to access the money you have within an investment. One risk of real estate investing is that investment properties are illiquid, meaning you can’t easily convert them into cash. Selling a property is neither a quick nor a simple process, and selling quickly or under pressure will most likely result in taking a loss on your investment.

This lack of liquidity forces real estate investors to hold their investments for longer than other types of investments, which is risky for those who might need access to cash quickly if necessary.

Real Estate Investing Risk #8: Foreclosure

When real estate investors are unable to commit to their mortgage payments on time for a few consecutive months, this can put their rental property at the risk offoreclosure – losing your property to the bank. Foreclosures are risky as they hurt your chances of getting bank loan approvals in the future.

The best way to avoid the risk of foreclosesis to make sure you first conduct a real estate market analysis and investment property analysis before you put a 20% down payment on yourreal estate investment, have an emergency fund, and try to pay off your mortgage payments quickly if you can.

Related: The Pros and Cons of Buying a Foreclosure

(Video) How to REDUCE RISK on Your Real Estate Investments [Self Storage]

Real Estate Investing Risk #9: Depreciation

In real estate investing, depreciation is the opposite of appreciation. In general, real estate properties are expected to increase in value over the years (appreciation). However, not all properties are guaranteed to grow in value. Therefore, a major risk ofreal estate investingis investing in a rental propertywhose value drops in the future, meaning the property investor will end up losing money.

Once again, the best way to avoid the risk of depreciationis to be very careful in your research andreal estate market analysis and study the economic growth of the real estate market to find a location withstrong positive real estate appreciation.

Real Estate Investing Risk #10: Legal Airbnb Issues

Short-term Airbnb rentals can be a very profitable rental strategy in real estate investing. However, many local authorities have been issuing legislation to limit Airbnb rentals, under pressure from local hotels. Thus, as a property investor, you might end up in lots of trouble if you rent out your investment property as Airbnb in a place where this is illegal. This risk is actually the easiest to avoid. Just read all relevant local – state and city –laws that govern Airbnb rentalsto ensure that they’re legal in your housing market.

Related: Your Real Estate Investment Guide to Airbnb Rental Properties: Where Is Airbnb Legal?

Click here to search for the best Airbnb rentals in the US real estate market to invest in!

Conclusion

Owning investment properties is a relatively safe investment. Nevertheless, real estate investors can never 100% guarantee a profitable investment. The above mentioned challenges are the most common risks associated with real estate investing which should always be taken into consideration before buying a rental property.

Smart and successful real estate investors conduct a thorough real estate market analysis in addition to a rental property analysis to avoid these risks. This includes studying the market economy, property inspection, computing expected expenses, and so forth. This gives them the ability to know when, where, and for how much to buy and sell, which ultimately helps them hedge against major losses.

Of course, this doesn’t happen overnight. This is the result of years spent in real estate investing and learning from past mistakes. Thus, if you’re on your way to becoming a real estate investor, don’t be discouraged and head over to Mashvisor to start learning!

Mashvisor made the process of real estate investing easier. Our platform provides actual and future real estate investors with the necessary tools to find the best rental properties (both traditional and Airbnb rentals). Not only that, but you also obtain analytics related to the expected rental income of an investment property and its estimated occupancy rate. Basically, Mashvisor allows you to make the best real estate investment decisions that lower the risks of buying investment properties.

Start Your Investment Property Search!

(Video) 10 Tips to Reduce the Risk of Buying an Investment Property

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10 Major Risks of Real Estate Investing and How to Reduce Them (1)

(Video) Unearthing the 3 Major Risks in Real Estate Investment on 16 Apr, 11am!

Eman Hamed

Eman is a Content Writer at Mashvisor. With a focus on market reports, she enjoys researching the state of the real estate market in different cities across the US. Eman also writes about trends, forecasts, and tips for beginner investors to gain the confidence and knowledge they need to make wise decisions.

FAQs

What is the biggest risk to a real estate investment? ›

Key risks include bad locations, negative cash flows, high vacancies, and problem tenants. Other risks to consider are the lack of liquidity, hidden structural problems, and the unpredictable nature of the real estate market.

What are some of the risks associated with investing in property? ›

Any property investor will face the risk of initial yields rising which will cause property value to decrease – this may be due to rising interest rates or any other reason, however during a recession you may risk rise in premia. This can mean property yields could rise even if interest rates may not.

What are the 4 main risks of investing? ›

4 real risks of investing (and what to do about them)
  • Your securities could lose value when you need to liquidate. At some point, your investments will lose value. ...
  • Your portfolio could underperform over time. ...
  • You could get overconfident. ...
  • You could lose confidence. ...
  • Facing risk.

Which is the major disadvantage of real estate investment? ›

Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities. Another disadvantage of property investments is that they are not easy to liquidate.

How can you reduce the risk of investing in real estate? ›

Asset Diversification: Like geographic diversification, one should also invest in numerous assets to reduce market and economic risk. Putting the money across assets such as residential, commercial, retail, warehousing, etc. optimizes the overall returns.

How can real estate investors reduce risk? ›

7 Ways To Minimize Risk in A Real Estate Investment
  1. Learn About the Real Estate Market in Multiple Cities. ...
  2. Select the Right City to Invest In. ...
  3. Understand the Micro-market and its Trends. ...
  4. Select a Project Based on its Functional Attributes. ...
  5. Select a Project at the Right Stage of Development.
21 Sept 2021

What are 3 risks common to the real estate industry? ›

Like many small business owners, a real estate business can take years to build.
...
Here are some common risks that real estate agents face, and how to protect against them:
  • Omission. ...
  • Failing to deliver service. ...
  • Wrongful discrimination. ...
  • Accidents.
11 Jul 2014

Is there risk in investing in real estate? ›

Real estate investment comes with its risks. For example, you may lose money on a property in the process of flipping the structure, getting your real estate investment ready to rent, or selling it. However, you can avoid money loss with research and a well-constructed strategy.

What are the top 10 risks? ›

Top 10 Op Risks 2022
  • Talent risk.
  • Geopolitical risk.
  • Information security.
  • Resilience risk.
  • Third-party risk.
  • Conduct risk.
  • Climate risk.
  • Regulatory risk.
31 Mar 2022

What are the five 5 possible options for treating risks? ›

The basic methods for risk management—avoidance, retention, sharing, transferring, and loss prevention and reduction—can apply to all facets of an individual's life and can pay off in the long run.

What are the 5 types of risk factors? ›

In general, risk factors can be categorised into the following groups:
  • Behavioural.
  • Physiological.
  • Demographic.
  • Environmental.
  • Genetic.

Why real estate is high risk? ›

Financial Risk:

The interest rates are never constant, and this can lead to rise in the financing costs, which is surely not good for you. Both commercial and residential property investor are affected by this risk.

What are the three most important factors in real estate investments? ›

Expected cash flow from rental income (inflation favors landlords for rental income) Expected increase in intrinsic value due to long-term price appreciation. Benefits of depreciation (and available tax benefits)

How can we reduce risk? ›

BLOGFive Steps to Reduce Risk
  1. Step One: Identify all of the potential risks. (Including the risk of non-action). ...
  2. Step Two: Probability and Impact. What is the likelihood that the risk will occur? ...
  3. Step Three: Mitigation strategies. ...
  4. Step Four: Monitoring. ...
  5. Step Five: Disaster planning.

What is risk reduction in real estate? ›

The reduction of uncertainties for harm

an agent dealing with another broker, their agents or a member of the public to find a match for the individual they represent regarding ownership, financing or the letting of real estate.

How we can reduce risk in portfolio? ›

Ways to Help Reduce Risk in Your Portfolio
  1. Sometimes it takes a stock market drop to get investors thinking about how to better protect their downside. ...
  2. Reassess your risk tolerance.
  3. Before you make any adjustments to your holdings, make sure your financial plan is up to date: ...
  4. Rebalance your portfolio.

What are the common mistakes in investing in real estate? ›

Common mistakes to avoid when investing in property
  • Deficient planning. Choosing the appropriate property and attaining the desired outcomes require more than luck. ...
  • Insufficient research and due diligence. ...
  • Lack of know-how. ...
  • Not enough cash flow. ...
  • Final word.
19 Aug 2022

How do you identify risks in real estate? ›

One way to assess property risk is to assign each risk factor a score, wherein a 0 means “no risk” and a 3 means “high risk.” By totaling the risk scores, an investor can weigh the various risks against each other and have a better sense of the overall risk.

What is a real risk example? ›

Loss of health. Loss of loved ones. Loss of life. Financial advisors are definitely obsessed with portfolio risk, but our true value lies in the conversations about real risk.

What are the major types of risk? ›

Risk Types: The different types of risks are categorized in several different ways. Risks are classified into some categories, including market risk, credit risk, operational risk, strategic risk, liquidity risk, and event risk. Financial risk is one of the high-priority risk types for every business.

What are the 6 types of risk factors? ›

3.2, health risk factors and their main parameters in built environments are further identified and classified into six groups: biological, chemical, physical, psychosocial, personal, and others.

What are the 4 types of risk? ›

The main four types of risk are:
  • strategic risk - eg a competitor coming on to the market.
  • compliance and regulatory risk - eg introduction of new rules or legislation.
  • financial risk - eg interest rate rise on your business loan or a non-paying customer.
  • operational risk - eg the breakdown or theft of key equipment.

What are the six steps to reduce risk? ›

  • Step 1: Hazard identification. This is the process of examining each work area and work task for the purpose of identifying all the hazards which are “inherent in the job”. ...
  • Step 2: Risk identification.
  • Step 3: Risk assessment.
  • Step 4: Risk control. ...
  • Step 5: Documenting the process. ...
  • Step 6: Monitoring and reviewing.

What are the 7 steps of risk management? ›

The 7 steps below provide a good framework for effectively managing project risk.
  • Step 1- Outlining Objectives. ...
  • Step 2 – Risk Management Plan. ...
  • Step 3 – Identification. ...
  • Step 4 – Evaluation. ...
  • Step 5 – Planning. ...
  • Step 6 – Management. ...
  • Step 7 – Feedback.
10 Jul 2017

What are four 4 response strategies to negative risk? ›

The five basic strategies to deal with negative risks or threats are Escalate, Avoid, Transfer, Mitigate and Accept.

What are 3 examples of risk? ›

Examples of uncertainty-based risks include:
  • damage by fire, flood or other natural disasters.
  • unexpected financial loss due to an economic downturn, or bankruptcy of other businesses that owe you money.
  • loss of important suppliers or customers.
  • decrease in market share because new competitors or products enter the market.
1 Feb 2021

What are key risk factors? ›

A key risk indicator (KRI) is a metric for measuring the likelihood that the combined probability of an event and its consequences will exceed the organization's risk appetite and have a profoundly negative impact on an organization's ability to be successful.

What is capital risk in real estate? ›

Specifically for real estate investors, risk capital is the money to fund a new venture. This might be the acquisition or construction of a new apartment building. Funds to purchase or construct the building need to come from somewhere. Funding sources may include a loan, investors, and some of your own money.

What should you avoid in real estate? ›

  • Failing to Make a Plan.
  • Skimping on Research.
  • Doing Everything on Your Own.
  • Forgetting Real Estate Is Local.
  • Overlooking Tenants' Needs.
  • Getting Poor Financing.
  • Overpaying.
  • Underestimating Expenses.

Why real estate is the safest investment? ›

Unlike other market-linked investment options such as stocks and mutual funds, investment in real estate comes with a low volatility quotient. Being a tangible asset, it is still one of the safest investment options in India.

What are the biggest challenges in real estate? ›

In today's digital world, everything is moving online and as a result, the effective use of digital marketing channels to build a customer base and drive sales are two of the major challenges that the real estate industry will face in 2022.

What are the top 10 features you would need to have in a rental property? ›

However, there are a few notable features that are always in high demand.
...
The Top 10 Features Requested by Home Renters
  • Storage. ...
  • Outdoor space. ...
  • Office space. ...
  • Noise insulation. ...
  • Heat insulation. ...
  • Ceiling fans, central air, etc. ...
  • Carpet-free spaces. ...
  • Kitchen counter space.
18 Sept 2020

What are the 4 factors that you should know before investing? ›

What are the factors to be considered before making an investment decision?
  • Factor #1: Lay your Financial Roadmap. ...
  • Factor #2: Check your Risk Tolerance. ...
  • Factor #3 Consider Asset Allocation. ...
  • Factor #4 Do not Fall for Volatility.
23 Apr 2020

What are the 5 main categories of real estate? ›

There are five main categories of real estate which include residential, commercial, industrial, raw land, and special use. Investing in real estate includes purchasing a home, rental property, or land. Indirect investment in real estate can be made via REITs or through pooled real estate investment.

What economic factors affect real estate? ›

These sort of economic factors that affect the value of real estate include vacancy rates in the area, material and labor costs, the availability of credit, interest rate, and earnings levels.

› ... › Real Estate Investing ›

A key when considering property location is the mid-to-long-term view regarding how the area is expected to evolve over the investment period. For example, toda...
If you want to join the ranks of successful real estate investors, the elements here are the ones which you need actively consider.
In fact, you can lose a lot of money if you make poor real estate investment decisions. So do your research and consider these 12 important factors before makin...

What are 3 risks common to the real estate industry? ›

Like many small business owners, a real estate business can take years to build.
...
Here are some common risks that real estate agents face, and how to protect against them:
  • Omission. ...
  • Failing to deliver service. ...
  • Wrongful discrimination. ...
  • Accidents.
11 Jul 2014

What risk does real estate have? ›

Negative cash flow is one of the most common risks for property investors. If you don't conduct your real estate market research and analysis, you could end up losing money. Negative cash flow occurs when your property loan payments, taxes, and other associated expenses exceed your rental income.

What is the biggest risk of owning a rental property? ›

Getting a tenant who cannot pay reliably is one of the biggest risks of owning rental property. Tenants who are chronic late payers can be a constant source of stress. Tracking down rent payments takes time and effort, and may cause your mortgage payments to be late, putting you in financial hot water.

What are the four 4 types of risk associated with real estate? ›

Here are eight risk factors investors should consider when evaluating any private real estate investment:
  • General Market Risk. ...
  • Asset-Level Risk. ...
  • Idiosyncratic Risk. ...
  • Liquidity Risk. ...
  • Credit Risk. ...
  • Replacement cost risk. ...
  • Structural Risk. ...
  • Leverage Risk.
12 Dec 2017

What are the common mistakes in investing in real estate? ›

Common mistakes to avoid when investing in property
  • Deficient planning. Choosing the appropriate property and attaining the desired outcomes require more than luck. ...
  • Insufficient research and due diligence. ...
  • Lack of know-how. ...
  • Not enough cash flow. ...
  • Final word.
19 Aug 2022

What is risk reduction in real estate? ›

The reduction of uncertainties for harm

an agent dealing with another broker, their agents or a member of the public to find a match for the individual they represent regarding ownership, financing or the letting of real estate.

Is there risk in investing in real estate? ›

Real estate investment comes with its risks. For example, you may lose money on a property in the process of flipping the structure, getting your real estate investment ready to rent, or selling it. However, you can avoid money loss with research and a well-constructed strategy.

Why real estate is high risk? ›

Financial Risk:

The interest rates are never constant, and this can lead to rise in the financing costs, which is surely not good for you. Both commercial and residential property investor are affected by this risk.

Is investing in property high risk? ›

Fixed interest and cash investments will generally be low risk (defensive assets) and assets such as property and shares are generally considered to be high risk (growth assets).

Is real estate the safest form of investment? ›

Every investment comes with some risk. However, real estate is often considered a relatively safe investment compared to other investments, such as stocks and bonds. This is because real estate is a tangible asset that is less volatile than other investments.

How can I make my rentals safer? ›

  1. DON'T hide spare keys around the property. ...
  2. DON'T leave your valuables lying around. ...
  3. DON'T leave your doors unlocked. ...
  4. DON'T tempt thieves with your latest purchases. ...
  5. DO consider a security audit. ...
  6. DO make sure your home is well lit.
13 Feb 2021

What is a real risk example? ›

Loss of health. Loss of loved ones. Loss of life. Financial advisors are definitely obsessed with portfolio risk, but our true value lies in the conversations about real risk.

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