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As a Real Estate investor or somebody looking to buy a property, there are certain risks the investor should know about. These are variable kind of risks but these risks can hurt the investor’s goal of profitability. In most cases however, a real estate or property investment is one of the safest mode of investments one can choose. The biggest and highest priority concern should be risk mitigation. Obviously, which is a high-level concern with risk management i.e. identification of risk, its evaluation and prioritisation. We can’t deny the fact that investing in general involves both the risks and the rewards. In most cases the higher the risk the greater is the potential for significant gains. Furthermore, the losses of invested equity.
While dealing in private equity real estate the fact that the investor is buying physical property is always a source of satisfaction for the investors. Mainly, because it increases the level of comfort for the investor in terms of risk calculations i.e. risk mitigation. Despite this there are plenty of risk involved in the commercial sector, i.e. commercial real estate investing. These are risks that have to be considered in parallel with the expected value of the investment. The investor should have to keep in mind how much can be their expected return. That is, how much should be the cost of property in a defined period, let’s say after ten years. Investments is all about risks and gain. However, the true evaluation of risk indeed is a huge blessing for a Real Estate investor.
These are some of the risks factors that should be considered when evaluating any private real estate investment:
IDIOSYNCRATIC RISK:
The real estate investment risks that we are dealing with right now is the idiosyncratic risk. Furthermore, it is a risk specific to a certain property. Which seriously means the more risk the more return. As an example, we can say that construction will add the level of risk to a certain project. Hence, as it limits the capacity for rent collection during that time period. This is definitely conditional and the condition here applied is construction or renovation to a property that can halt its original commercial value.
The type of the same risks is entitlement risk. Which is the Govt. doesn’t allow or permit the project to proceed further. Another type in the same category are the environmental risks that arises due to environmental hazards. These can also range from soil contamination to pollution. Other types includes budget over runs, political risks and workforce risks.
Another important and key risk factor is the location risks. These are risks which is part of the idiosyncratic risks. As an example, we can assume that a property has got some disturbances or lacking financial stability. Ironically, due to its location or another property in the same location. Finally, we can sum it up & conclude that the idiosyncratic risks are defined as the risks that are specific to the asset and the related or associated assets business plan.
LIQUIDITY RISK:
Liquidity risk means that how far the property is a good investment & how fast it can be turned into hard cash. The consideration that comes here is the actual depth of the market. On top of this, how one will exit the investment needs to be considered before buying. As a regular and professional investor, one can expect at least half a dozen buyers for a property in a city like Toronto. This is regardless of the related market conditions. At the same time a property that is located in Suburbs of Toronto example Brampton. Obviously, might not have the same number of market participants. This is a scenario that can be termed as a normal market condition in Canada. Thus, liquidity risk means largely that making it easy to get into the investment. However, difficult to get out.
GENERAL MARKET RISKS- ‘ANALYSING THE TRENDS’:
As the name suggests all the markets have ups and downs that relates to the property investment risks. These are risk that are tied to the economy. In addition to the economy, the interest rates, the general & periodic market trends and inflation. That is, decline of value or purchasing power of currency over a time period. As a matter of fact it’s true that even the smartest of investors can’t eliminate the market shocks. However, with a diversified portfolio they can easily hedge their bets against booms and busts. A diversified portfolio always helps in minimising the risks & improving returns.
Apart from a diversified portfolio another key factor that the investors can use to minimise the risks is to develop a strategy. This is strategy based on general market conditions.
These are some of the key and mandatory risks that as a real estate investor one should be aware of. Not only that, as an investor they should make an enquiry about these risks and receive straight answers for better investment decisions. As an investor be aware of any investment opportunities that don’t make all risks involved crystal clear.