Is real estate a high-risk investment?

The bottom line However, as with other types of investments, real estate investment can be risky. Risks can be limited through due diligence and thorough analysis of the real estate market and rental properties.

Is real estate a high-risk investment?

The bottom line However, as with other types of investments, real estate investment can be risky. Risks can be limited through due diligence and thorough analysis of the real estate market and rental properties. Each of these assets plays a different role in the balance of an investment portfolio. Stocks can provide quick gains or losses, and you can make a lot of money or lose it all.

Bonds provide steady income and are appreciated by older investors, who do not have decades to recoup investment losses, as younger investors do. Real estate can be the most complicated investment and is therefore sometimes overlooked by investors, even though it is a useful portfolio diversification tool. Real estate offers a slow and predictable rate of return over the long term and can be an excellent way to build wealth over the long term. However, direct real estate investment is not for everyone.

Among the drawbacks is how difficult it is to sell a property compared to stocks or bonds. In addition, it takes considerable capital and countless hours to invest directly in buying and managing rental properties. Investors who do not have a long time horizon, such as retirees who will not be in the market long enough to experience sufficient appreciation to cover transaction costs, do not tend to benefit from direct investment in real estate. Those with limited capital may have only enough money to buy low-cost properties.

Such rental housing can be difficult to manage due to high tenant turnover, low cash flow and little increase in property value. Leveling the real estate investment playing field Private mortgage fund loans are secure debt obligations backed by liens against the properties. Most private loan funds lend no more than 75 per cent of the value of the property, which leaves a 25 per cent ushion if the lender ends up foreclosing because the borrower defaults is conservative compared to the traditional mortgage market, where homeowners can borrow up to 100 per cent of the value of the property. Private loans are typically repaid in less than a year, compared to 15-30 years for a typical mortgage, which helps protect against the risk of the property's value falling while it is being rehabilitated.

Private loan fund investors receive monthly returns, so the income stream resembles that of a bond. But unlike a bond, the returns on private mortgage loans are not influenced by changes in interest rates. If these factors are not well understood and managed, real estate becomes a risky investment. And because investing in real estate involves putting a significant amount of money at stake, losses can be painful.

With the heavy debt loads often associated with real estate investments, you can face a dangerous proposition. With the pandemic sweeping the world and the real estate sector subject to uncertainty and potential difficulties, a debt-free strategy can be attractive. But a defensive real estate investment strategy prioritises limited or no use of debt in an effort to mitigate risk. A vacancy is a huge risk for real estate investors who rely on rental income to pay mortgage payments, insurance, property taxes and other expenses.

The most high-profile professional property developers and investors tend to be those who have won or lost big and who have made a name for themselves by taking excessive risks that have, in some cases, paid off and, in others, crashed. Avoid the risk of high vacancy; buy your investment property in a good location with a high demand for rental properties. In the ideal world, the perfect investment is one that has a high rate of return year after year along with a low risk of losing money. While this will create another expense for your real estate investment, it can protect your long-term interests.

Such strategies may include investing in products that involve higher risk investment strategies (leverage, futures trading, etc.). Setting realistic expectations and managing them in terms of the appreciation of your property can help you make a profit. Even a well-managed and maintained real estate property will be affected in value by a market downturn. But how much is appropriate, and how can you quantify investment risk to know if it is a risk you want to take? Having frameworks for investors to quantify risk helps ensure that the investment fits their needs, objectives and tolerance.

Buying the right property at the right price is arguably the most important part of being a successful real estate investor. Before jumping in head first, it is essential to understand real estate risk so that you can develop strategies to manage that risk and get the most out of your investment. You must understand the risks involved and, in turn, have positioned yourself to withstand potential losses.