A lot of people seem to think that the process of investing in real estate is much simpler than it actually is. It’s often said to be the safest way of investing your money and making a lot of profit in the near future. But is investing in real estate really so safe? Is a glorious payday that ensures your financial security for decades to come really as simple as putting a few hundred grand in a house or apartment?
You’ve probably already guessed my answer, even if you clicked on this article thinking the opposite: no, not really. It probably is the most reliable investment around, although the barrier to entry is obviously quite high. But it’s not something that comes without its risks. There’s a lot of potential for mistakes and financial failings when you take the path of real estate investment; it’s essential that you don’t get into this thinking any different. In other words, don’t get too cocky!
We’re going to take a quick look at some of the common and dangerous risks you need to mitigate if you’re looking to invest in real estate.
Not considering short and long term
A lot of people in this area have their eyes set sharply on the long term. This seems pretty smart, right? After all, too many people aren’t thinking enough long-term-wise when it comes to finances, careers, health, etc. Everyone seems to think about what can be immediately satisfying, usually to their later detriment. So why would focussing so much on the long term be a bad thing? We’re talking about investments, after all. Isn’t thinking long term the entire point?
Here’s the problem: if you think only of the long term, then you forget to consider the short-term dangers. And there are a lot. If you don’t consider working with bridging finance specialists, for example, then you may find yourself very short on cash in the short term — which can also affect the long-term investment, even if you’re able to afford to pay your way for the time being, anyway. Don’t sacrifice too much of your short-term safety and comfort under the impression that you’ll definitely see great results in the future.
Bank loans: not as convenient as you might think
Banks are basically the first stop for anyone who wants to get their hands on some capital, right? And there aren’t many people out there who can buy a home without assistance in getting that capital. For some people, instead of taking the more formal route of getting a mortgage, it makes sense to get a regular loan from the bank.
But loans from your bank are rarely a good way of getting started in real estate. It can work out sometimes, but — as with any loan — you must make sure you read the small print! Traditional bank loan arrangements aren’t usually great for real estate investment, mainly because the interest rates aren’t as fluid or convenient as you would need them to be. You also need to consider the fact that some banks won’t let you use a loan to invest in a property that you’ll then rent out to others.
Crime in the area
Anyone interested in buying a home should worry about crime. Even if you’re not planning on living there, you should check the crime rates in the neighbourhood. People don’t always check the local crime statistics before investing in a property, which is a big mistake. A neighbourhood might be beautiful, but this doesn’t mean it isn’t a hotbed of thieves. Check for crime statistics in the area before making any real real estate investments! A potential buyer in the future may check the crime rates that you ignored and get scared off the purchase. There’s also the increased risk of the property suffering criminal damage and thus losing value.
You need to get a professional to inspect the property before making an investment or signing any contracts. It’s not exactly a quick process because they need to go through the entire property, but this doesn’t mean you shouldn’t do it. You don’t want to buy a property that turns out to have severe structural problems, foundational damage, termites, plumbing errors, or damp. All of these things will harm the value of the property. This doesn’t mean you should be scared off those properties that do have problems (a fixer-upper can be a great investment!), but you should definitely know about the problems beforehand. Otherwise, you may end up paying more than the property is really worth.