The 6 Biggest Risks of Real Estate Investing

Wooden house balancing precariously, real estate investing risks concept

Investing in real estate can be a very lucrative business, especially when you do your research, make smart decisions and purchase good properties. Like any business, real estate investing can present certain risks. Here are the 6 biggest risks associated with real estate investment as a business:

1. Financial Risk

Of course, this is the most important and obvious risk facing any real estate investor. You are putting a lot of money on the line when buying investment properties. Whether you are paying cash or financing your purchase through some sort of loan (mortgage, private lender, investment partnership, investment fund, etc.), you are taking on a significant financial risk. Do your research, crunch the numbers and make smart decisions to avoid major financial losses.

2. Structural Risk

We’re not talking about the structure of the property you are buying (though that is also a concern). We’re talking about the financial structure of your business and any real estate deals you are making. This is especially important when loans or any outside financing sources are involved. Do your diligence to structure each investment properly and minimize risk for you and any financial partners.

3. Legal Risk

Certain responsibilities come with owning real property, managing rental units and other aspects of real estate investing. Use the right legal structure for your business to provide financial and legislative protection. Understand all the rules and regulations concerning all aspects of your investment business. Do what it takes to avoid any potential legal issues.

4. General Market Risk

Some aspects of real estate investing are out of your control. The real estate market can and will fluctuate over time. You need to be adaptable to changing market conditions and your investment plan needs to be designed to withstand any significant shifts. The general market always present a certain amount of risk no matter how much you prepare.

5. Asset-Level Risk

There are numerous types of real estate investment assets and each will come with its own unique set of challenges and risks. Whether you are renting out properties (single-family vs. multi-family), flipping houses, investing in commercial properties, wholesale investing, or any other type of real estate investing, understand the risks and build your business plan appropriately.

6. Location Risk

This is similar to the market risk, but more focused on the location of the property itself. Property values can go up and down. Some locations are trending upward while others are losing appeal. Consider the general market of your investment as well as the specific location to find the best investments and mitigate risk.

If you are a real estate investor looking to make the most of your business, consider joining the PropertyLark home buying network. Learn more about what resources we can provide to help you optimize your investment plan.