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Investing in real estate has long been a promising avenue for wealth creation and financial stability. However, making informed property investment decisions requires a thorough evaluation of the associated risks. Ali Choudhri, CEO of Jetall Capital, provides invaluable insights into a few of the more prominent risks facing any real estate investment. It is crucial every investor knows of these risks and can assess their impact on each individual project. 

Key risk points that can impact your property investment:

1.Bad Location: Discover market analysis’s critical role in property investment risk assessment. Learn how to identify trends, assess demand and supply dynamics, and anticipate market fluctuations. Location is your first AND second consideration when buying an investment property. The thing that makes real estate so consistent and predictable is its permanence. The apartment I rented at 19 years old is still renting to people today – and I am 53 now. A couple of coats of paint were removed from the racquetball court, but otherwise, it is still the same. But location frames your ability to make a profit. Local demand for rental properties, rental property inventory, tenant behavior, creditworthiness, desirability of the area, etc.… they all factor into this equation.

2.Hidden Infrastructure Issues: Infrastructure issues are like playing with fire. If you do not pay attention… you will get burned. You will get burned if you underestimate the costs of repairs and maintenance or don’t inspect the property properly and with a discerning eye. Consider a standard single-family home where repairing the foundation may entail expenses of up to $12,000, while addressing issues with siding or air conditioning could potentially cost around $15,000 each. For commercial buildings, structural repairs or mold remediation might incur costs reaching tens of thousands of dollars. Emphasizing the importance of thorough inspections is crucial, as they can uncover flaws in a deal that may not be readily apparent to the naked eye. Cutting corners on inspections could lead to unforeseen challenges and substantial financial burdens in the long run.

3.Problem Tenants: A bad tenant can become more of a financial and time drain than an unrented property. Some tenants pay their bills late every month or don’t even pay their rent at all, destroy the rental property, ignore maintenance needs until a larger problem develops, bring in their zoo, friends, and relatives to live in their space, and generally ignore their responsibilities. This leads to eviction, but that is a long and expensive process.

Implementing a tenant screening process, including a credit check, a criminal background check, work history, and vetting referrals and past landlords to see if they were late, damaged property, or had to be evicted previously.

4.Vacancies: High vacancies are especially risky if you count on rental income to pay for the property’s expenses (i.e., mortgage, insurance, property taxes, maintenance). The bestThe best way to avoid the risk of vacancy rates is to buy a property in high demand and a good location. You can also avoid dead beats if your Price rates are slightly above market range while ensuring your property is clean, tidy, and well-maintained and has unique benefits other properties don’t have in your area. Most importantly, develop a reputation for being fair and renting quality properties. Be ethical, have a social media presence, and communicate with tenants. Consider offering tenant incentives or rewards for referrals.

5. Negative Cash Flows: If you have more expenses than income, you are experiencing negative cash flow. Put, being the wise owner and investor you are, you now have to take your after-tax dollars and pay for the negative cash flow each month. Congratulations!

But like a sinking ship, you need to plug the holes. These could be:

• High vacancy rates
• Costly maintenance
• High financing costs on borrowed money
• Below market rent rates 
• High commissions

Some of the best deals are when you buy a property that has some of these obvious problems, and then you fix them and net a nice profit along the way.

6.Market Dynamics: Real estate, like any other market, goes up and down at times and with interest rates, the economy, government policies, etc. You only have to look at the state of commercial real estate post-Covid to see that very clearly laid out. Some markets have less than 50% of their office workers back in the office, meaning giant swaths of vacancies and buildings falling into foreclosure. It is important always to keep your eye on market dynamics so you can be ready to pivot, and also a good reason to be wary of being too overly leveraged.

7.Liquidity: Stocks and cash in hand are liquid, easy to convert to something useable to pay bills or do a transaction. That is not the case with real estate. Because of the lack of liquidity, you could end up selling below market or at a loss if you have to exit the transaction rapidly. While there are ways to access cash (equity loan line of credit or cash-out-refinance), you need to keep a close eye on liquidity and reserves. Also, when you can manage it, a fixed-rate loan is usually the safest route to take, as rate increases can put a massive squeeze on liquidity.

Real estate has traditionally been considered a safe investment, with passive income, excellent ROI, tax advantages, and an opportunity to build wealth. However, no investment class is without risk. Risk of losing some or all of your investment capital and precious unrecoverable time invested.

Ensure you take precautionary due diligence seriously, do a market and rental analysis, hire professionals, and screen tenants. These are basic steps to keep you from making gigantic mistakes that eat through your capital like a hot knife through butter.