Major Risks Of Real Estate Investing And How Can You Reduce The Risk Of Investing In Real Estate?

There are risks involved in any type of investment -commercial, residential, or commercial property. However, some investors are unwilling to take on these risks because they don't have enough knowledge or experience in the field. This article will provide you with an overview of common real estate investment risks and the steps investors can take to reduce these risks to be successful at reducing their potential negative consequences.

Risks in real estate investing.

1. The risk of financial loss

2. The risk of fraud

Also Read: What is commercial and residential in real estate- who's Invest is more riskier

The risk of over-leverage and bottom line failure.

Most investors are reluctant to borrow against their investment as it is assumed this will reduce the return on investment (ROI). However, when a real estate property is purchased in a personal or investment name, the amount of leverage is irrelevant. The amount of power used becomes relevant if the property is purchased on a corporate or LLC (Limited Liability Company) basis. This may determine the amount of income tax liability due to debt service income.

If a property is purchased by borrowing 100% (money not secured by a mortgage or deed of trust), this creates the maximum over-leverage, and the lender will advance the number of funds needed to purchase the property. This can result in substantial over-leverage. If more money is borrowed than is currently required to own and operate, there is no way to ensure that more money will always be available to cover any shortfall. This can result in significant cash flow shortfalls if money must be borrowed at a high-interest rate or if income must be paid out on high loan principal balances. Cash flow shortfalls can result in defaulting on loan payments and foreclosure proceedings.

Reasons investors may over-leverage:

There are several different types of fraud in the real estate investment field. Investors are often exposed to fraud by agents, developers, and other people they work with, contractors, tenants, and buyers. Fraud is not limited to commercial or high rise buildings. Residential real estate investors can also be deceived. Real estate investment fraud occurs more frequently than most people think, and it is estimated that one out of every six properties purchased has been defrauded somehow. The FBI reports losses from suspected residential real estate fraud totalling $3 billion annually between 2004 and 2007.

Also Read: Important things NRI investors should ponder before investing in Indian real estate properties

Types of fraud:

Real estate investors are exposed to fraud, from home flippers to significant investors. Fraud and crime occur within many real estate investments, including residential, commercial, and newly developed properties. Many scams do not result in noticeable losses for the first few years of ownership, making them more challenging to detect. Real estate investment fraud can cost the investor a great deal of money or even a property loss. Real estate criminals usually victimize those who are less experienced with real estate investing or markets, have limited knowledge about real estate investments (such as foreign investors), or are new to an area and unfamiliar with local customs.

Also Read: How to File a Complaint Against Fraud in Consumer Court in India

To reduce fraud risk:

1. Learn as much as possible about the real estate market you are investing in. 

2. Research all potential buyers, buyers' agents, and sellers alike. If you are a new investor, use a reliable agent familiar with local real estate trends and who has established business in the area.

3. Pay attention to property "red flags" - warning signs of fraudulent activity:

4. Learn to recognize red flags:

Investors should also take steps to protect themselves from fraud related to mortgage foreclosures, which can cost investors over $12 billion per year, according to FBI estimates for 2007 alone. As with other types of fraud, investors have specific steps to reduce their risk.

Also Read: Top Real Estate Investing Tips for New Investors

For example:

Avoid purchasing properties in high foreclosure (or potential foreclosure) areas.- Avoid letting real estate agents conduct activities that require access to your residential property by uninvited persons (through the day or night). - Do not sign blank documents without verifying and understanding what is being signed. - Consider using the services of a professional title company and lawyer.

Investors should also protect their credit and personal information because some people may use it for identity theft or other fraudulent purposes. You should monitor your credit report and review it regularly, checking for changes. This can alert you to possible identity theft and fraud. It would be best if you also informed your bank about any changes in your personal information, such as your address or phone number. However, remember that knowing your personal information may give you a false sense of security. 

A study conducted by the Center for Economic Policy Research (CEPR) found that only one in four identity thefts occurred due to stolen or leaked information. The other three-fourths originated from criminal acts such as unlawful means used to procure personal data, which could involve illegal sources such as dumpster diving or computer hacking. Therefore, it is imperative to protect your assets and personal info in other ways aside from monitoring your credit report and bank account statements. Here are several ways you can protect your assets:

- Keep a list of all credit cards, bank accounts and other personal information in a secure place, preferably in a safe or locked cabinet. Do not carry your Social Security card with you. 

- If you must carry a Social Security card for identification purposes, keep it separate from any other personal information.

- Have at least one credit card only used for small, infrequent purchases.

- Shred all documents that contain personal information before throwing them in the garbage. 

- Do not give out personal information over the phone or online unless you have initiated the contact and know about the organization requesting such information.

FAQ

Q: What do real estate investors do?

A: Real estate investors buy and sell all types of real property, including single-family homes, condominiums, townhomes, commercial property, raw land, and even undeveloped land.

Q: How can I become a real estate investor?

A: The first step is to affiliate with financial partners with proven track records in the industry. Then you can begin taking steps toward becoming a successful real estate investor by creating and developing an investment plan. Your investment plan should include a list of all your assets, debts, liabilities, and your income and expenses. From there, you should start acquiring your real estate investment education.

Q: How do I find an excellent real estate agent?

A: Begin by asking trusted friends and family for their recommendations of the best agents in your area. You can also search for real estate agents on the Internet or look in the phone book. Make sure you have a list of agents you consider interviewing, and visit their websites to learn more about them. Make sure it is easy to contact them and ask questions via email or call. This will help ensure they respond quickly when you need answers or help with an issue that has come up with one of your properties.

Q: What types of escrow services are there?

A: Many escrow services depend on your goals, size, and location. Some investors prefer to handle the escrow themselves; others prefer to use an escrow company. Both options can benefit confident real estate investors, but you should discuss which kind of escrow service is best for you with your financial advisor.

Q: What properties can I buy?

A: To start investing in real estate, you should purchase a small piece of land near where you want to live and build a house. However, you do not have to have experience building or remodeling any property before buying one. You can consider the following things when looking for a property to buy:

Q: What should I look for when buying a piece of property?

A: First, you should make sure the property is well-maintained. It would be best if you also got thoughtful about how to increase the value of a property through renovations, add-ons, and even basic landscaping.

Q: What are some types of properties that people buy?

A: There are many properties you can buy into as an investor. For example, you may purchase single-family homes that need work in need of renovation. However, you could also invest in raw land and build an entire neighborhood from scratch with other investors.