How to Reduce Real Estate Investment Risks: 12 Expert Tips
Discover key strategies to safeguard your real estate ventures in an uncertain market.
Risk is part of any investment. Nowhere is that more apparent than in real estate. When you purchase a property, there’s no guarantee you’ll see a profit. Renters may stop paying rent, the economy might suddenly crash or the real estate market may shift. Here are 12 tips to reduce real estate investment risks.
1. Diversify your portfolio
The golden rule of real estate investing is to diversify your portfolio. This means purchasing different types of properties so you won’t suffer too much financially if one investment collapses.
For example, central retail locations, such as malls, have suffered a severe downturn as commerce moves online. Real estate investors who own other types of real estate, such as rehabbed houses or vacation rentals, will likely see better returns than those whose portfolios are stacked with brick-and-mortar shops.
2. Expand to other locations
Diversifying your portfolio is about more than just what you buy. It’s also about where you buy. This means owning property in urban, suburban, and rural areas and expanding property ownership to other states. Consider working with long-term tenants who are looking to move to another location. It’s a win-win if a landlord and a tenant can find a great new location together.
3. Monitor industry trends
Paying attention to industry trends can help you make better choices regarding new investments. Heed important industry data, such as:
- Where people are moving and where they are leaving
- Micro-markets, such as areas close to schools, transportation, amenities, and greenspaces
- Cultural trends
Trends can be tracked through investing apps or by subscribing to major industry publications.
4. Make sure you’re insured
You’ll need comprehensive insurance for any properties you own. This is an industry standard and protects against vandalism, fire and other natural disasters.
If you are concerned about tenants defaulting or not paying rent, rent guarantee insurance is also an option.
5. Take care of your investment
It can be tempting to neglect maintenance and upkeep when money is tight, but resist this urge. Not only does proper care and maintenance protect the value of your property, but it also makes it more attractive to prospective tenants. Additionally, regular maintenance means you’ll catch small problems before they become big ones.
6. Rent carefully
Background checks that screen for criminal history and financial problems are important. These help you find the most reliable tenants for your property.
7. Manage costs
Hidden costs can potentially increase real estate investment risks. On top of your mortgage payment, you should also expect to pay real estate agent commission, closing costs, taxes, insurance and maintenance expenses.
If money is tight and the economy is uncertain, keeping track of every penny is important. Check regular bills — such as insurance, utilities and taxes — to ensure rates are competitive and you get whatever discounts you qualify for.
8. Find unique opportunities
Experienced and novice investors alike tend to stick with what they know: commercial, residential, medical and retail spaces. But they should also consider unique real estate investments, such as parking spaces and garages. Consider the number of times you’ve driven around a building looking for a parking spot, and you’ll immediately understand the value of these unusual investments.
9. Maintain a financial cushion
No matter how carefully you plan, predicting every twist and turn you might experience is impossible. For this reason, it’s important to maintain a financial cushion that you can spend in emergencies, which may include:
- Unexpected vacancies
- Market downturns that lower demand
- Unforeseen repairs
Every situation is unique, and there’s no specific rule dictating how much of a financial buffer you’ll need. Some investors might be comfortable with a few thousand dollars in the bank. Others advise against keeping too much cash on hand and recommend reinvesting every penny into a new property instead. If you’d feel more comfortable with an emergency stash, set up a high-interest savings account so your money is making money while it’s in reserve.
10. Follow the rules
Nothing torpedoes your profits faster than fines and legal fees accrued when you don’t follow the rules. Before purchasing or selling a property, make sure you have legal counsel specializing in real estate to review all contracts. You’ll also need to ensure the zoning is correct for your intended purposes. Changes in zoning can be time consuming and expensive if modifications are needed.
11. Make sure your timeline matches your goals
Some real estate investment risks are a long game. Do you have time for that, or are you interested in more immediate results? Few investments will be profitable overnight, but some will be more productive sooner. Commercial real estate has had historically high returns, while residential properties have had lower returns. However, a well-placed rental can produce consistent income. The property that’s right for you will depend upon your objectives.
12. Assemble a solid team
Teamwork makes the dream work. From your real estate agent to your property manager, assemble a solid team committed to you and your portfolio. Your team can help protect your investments, even in a challenging market.
Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times and more.