Investing is all about managing and mitigating risks to gain rewards, but managing them can be difficult.
There are many untold, unplanned, and unexpected dangers in real estate investing.
Trained professionals are used to them and have come to expect the ebbs and flows of the market after years of observation and understanding.
Someone with vested interests in their portfolio may end up making mistakes based on whims or poor advice.
Although the dangers may be great, real estate investing is also one of the most lucrative and rewarding ways to diversify your investments. Not to mention, the rewards happen to be a direct result of the work YOU put in.
You’re especially faced with many of these risks as a new investor. It’s difficult, but not impossible to adjust your methods to find ways to thrive and profit. The risks that come may outweigh the financial security real estate provides, especially at first.
Utilizing the advice from experienced investors, including these six tips you’ll find from HNB Realty, will help you navigate the waters a little smoother. These tips are presented as hazards to be aware of, most of which are not realized by new investors. It’s on you to avoid these pitfalls to prevent huge losses – but after all, high risks often yield high rewards.
The professionals at HNB Realty have done the work it takes to get here – including navigating the waters of these types of hazards – bad investments and similar obstacles.
That experience has helped us form better game plans for our clients, resulting in a much higher rate of mitigated risk.
1. Bad Property Value
When you look for property to buy, you may be attracted by a low price or a discounted deal that seems too good to be true.
Real estate value is only going up as we continue through periods of economic uncertainty, so when a value is surprisingly low, you shouldn’t be surprised to learn that it’s probably for a good reason.
Poor property value is the most prominent risk when entering the real estate market.
But that’s the principle of investment. You buy low to sell high, right?
Maybe with stocks – but with houses and buildings, getting the price higher takes a lot more than luck.
Lowered value comes from a wide range of situations, many of which we covered in our list of 6 factors that influence home value.
Low costs may indicate small square footage, poor room placement, age and condition, damage assessment, repairability, equipped amenities, and other convenience factors. It would be best to consider who would buy or rent the asset to make your profit.
Purchasing an investment that’s too poor or too damaged can make it costly to improve.
Always do an inspection, review past inspections, and determine if the low price is worth trying to flip or if that low price is the highest it could ever be.
2. Poor Neighborhood Conditions
Three things drive real estate value conditions: location, location, and location.
It’s an old pedestrian saying but often a true one. Where a real estate asset is located will determine its value more highly than any other factor.
Every asset has a history, and if that history is bad or perceived as bad, its value will reflect that. You want real estate that is kept in good company, with a positive and rising neighborhood around it.
Whatever kind of real estate asset you are pursuing, consider the general state of the neighborhood – low property values come with higher levels of crime, unrest, and damages to surrounding properties.
The market dictates and sets these values as old neighborhoods become renovated through coordinated efforts and move-ins from big spenders who turn neighboring plots into part of their investment.
But this is rare.
Unless it’s part of your plan to re-invest in the neighborhood to improve a low-value asset or lot, you’re better off checking out a better neighborhood where the values are more stable.
Here’s a list of HNB Realty’s best neighborhoods to buy in.
3. Low Liquidity
The thing about real estate investing is that the value stays in the house.
Keep in mind that as inflation continues to affect markets, your value will increase over time alongside the market, typically a slow but steady build-up from nothing to something, from a low or rental property into one with actual value and no issues with its costs.
There is no practical short game in the real estate market.
You’re either in it for the long haul, or you may be set up to take a loss. The real estate craze of the past where “house flipping” was a fad for do-it-yourself entrepreneur laborers has come and gone, and the result was widespread dissatisfaction.
Reality TV shows make it look easy, but there is no easy money here.
The main issue lies with liquidity. Real estate is not a liquid asset. A real estate asset valued at a certain amount won’t sell at that amount tomorrow.
You’re at the mercy of a changing and evolving market. All you can do is increase the value by construction, which takes time to bring in quality.
But, if you’re more into long-term asset gains, you can form passive income streams to make a profit gradually over the years.
Your investment will last as long as your building does.
Many assets come with liability control, but that liability tends to end when you give up control of your share.
A lousy market is hard to pin on anyone, so lawsuits aren’t that common. With real estate, you’re at risk for a lot more as the owner and maintainer of a property.
If the tenants have anything to say about it, you’ll be hearing from their lawyers first.
If something is wrong with your property, it’s on you to fix it before it becomes a problem – even if you didn’t know it was a problem in the first place.
Make sure that you’re buying the right kind of property. Observe the building codes and registrations to understand what type of property you can legally manage from that location.
If you have an LLC, you can own your rental properties through there, although you may require some expert advice on making that work. You’ll also oversee the insurance, so get an excellent policy that protects your property and the people inside it.
Take some classes or hire an asset protection lawyer to ensure your asset collects value instead of court cases.
Over the years, HNB Realty has built rapport with many of Houston’s best Real Estate lawyers. These resources are always made available to our clients when they work with us.
5. Over Leveraging with Loans
Real estate is expensive. For new investors, unless you’re coming into the market with massive gains from a 1031 exchange or another investment, you’re most likely looking at using leverage to take out an asset-backed loan.
Real estate loans investment is one of the more common strategies -Loans are a risk in themselves, especially if they have predatory interest rates or hostile default clauses.
Often, the liability of a loan can result in bankruptcy, derailing plans and dreams before you get to see them come to fruition.
Suppose you have a strategy to open a cash flow from your property, such as renting it out as part of a business. In that case, you can pay off the loan with your profit as you increase its value through maintenance, repairs, and new construction to make it more appealing for new tenants.
Diversifying your portfolio and your investments is the goal here.
6. Having a Bad Partnership
There are hidden dangers and unknown changes in the real estate market that you won’t be aware of until they happen to everyone and change the investment landscape again.
You can’t have one eye on your investment and another on the countless records that may indicate the future of the whole market. But you can hire someone who can help. Hiring experts, such as HNB Realty reduce your risk factor and exponentially raises your chance of making a wise long-term real estate investment.
Because after all, real estate investing IS a risky business to get involved in. A lack of education, proper mentorship and guidance, and bad advice can lead to detrimental mistakes.
However, with the help of experts who not only understand the risks but understand and have been involved with the actual market, it can become one of the most secure ways to diversify your portfolio.
Our real estate investors are tapped into the market and have seen it change drastically over the years, and they know what signs to look for and how it will change again.
You want to seek out pros specializing in your area who know the local market and how the country and global markets will reach it.
For Houston, the obvious choice should be HNB Realty. Call us today and schedule a consultation!