Education

Real Estate Investing Risks

By Nat Kunes January 5 2020 5 min read

Although traditional investment lore says that purchasing real estate is generally a solid way to generate income, investment properties aren’t without a certain degree of liability — and fledgling investors are far more likely than their more experienced counterparts to encounter these risks. Fortunately, you can minimize your chances of making bad investment choices by using state-of-the-art investment management software.

Read on to learn some of the real estate investing risks that you and other new investors should avoid.

Attracting and Retaining Good Tenants

Whether you’re considering purchasing residential or commercial investment properties, it’s important to keep in mind that the property is only worth what a good tenant is willing to pay for it. Properties that lack a desirable location are particularly vulnerable to becoming a liability instead of an asset, and property owners are often left in the precarious situation of having to choose between having bad tenants and having no tenants. Be sure to check the rental history of the property carefully before signing the final purchasing papers, but don’t let your investigation stop there. It’s also necessary to obtain a clear picture of the projected potential growth or decline of the given area.

Dealing With Property Damage

Property damage occurs for a number of reasons. Renters almost never feel the same level of pride as experienced by homeowners, and therefore don’t pay as much attention to upkeep. However, a small number of residents may intentionally damage property, especially if they’ve been forced to leave due to an eviction. This is a significant issue for property owners with rentals in less than desirable areas, and it’s not uncommon for any profit to be eaten up by repair and replacement costs. In addition, leaving a property empty — even if it’s just for a short period of time — while searching for a decent renter can come with the risk vandalism.

Not all damages are caused by renters, however — natural disasters are also a primary culprit, and it can take months if not years for insurance companies to reimburse you for the cost of repairs and restorations. If you don’t have an emergency fund for unexpected expenses, you could lose substantial amounts of income while waiting for insurance payments.

Possible Lawsuits

Another thing property owners have to worry about is lawsuits. As a general rule of thumb, poorly maintained properties generate more lawsuits than their well-cared-for counterparts. All it takes is one tenant, guest, or delivery person to slip on a loose step for a property owner to find themselves in the middle of an unpleasant lawsuit. Part of mitigating this type of risk is to have a good insurance policy, but it’s also important to have high maintenance standards to minimize the possibility of injury-related accidents.

Property owners sometimes create an LLC for their investments as a way to guard against potential lawsuits affecting their personal funds, but this decision shouldn’t be made without first consulting a skilled and experienced investment advisor.

Declining Property Values

The bust-and-boom cycle of the real estate market also plays a big part in the overall picture when it comes to assessing investment risk. Because the current real estate and stock market runs are the longest in the history of the U.S. economy, many of those entering into the real estate investment pool haven’t personally experienced its classic ups and downs, and this can cause panic when property values decline.

Developing an effective, long-term strategy is an important part of avoiding risk in this area. Purchasing real estate as a quick flip worked for some investors before the last big real estate bust cycle in 2007-08, but that strategy left many investors and homeowners underwater. Taking the long road and expecting and preparing for normal market fluctuations is a better approach. As a rule of thumb, you should never go into a real estate investment without a cohesive and workable exit plan in place.

Another thing to keep in mind when considering purchasing income property is that real estate investments aren’t liquid, so you won’t be able to quickly access funds. You should also plan for a lengthy selling process when the time comes to cash in on your investment.

How Technology Can Minimize Real Estate Investing Risks

Implementing modern technologies can help minimize your real estate investing risks by providing clear insights, so you can make informed and strategic decisions. Here are a few of the ways AppFolio Investment Manager works to mitigate risks when it comes to real estate investing:

  • Easily Organizes Data:
    AppFolio collects all of your data in one central hub with bank-grade security to increase efficiency and reduce the chance of a breech.
  • Streamlines Communication:
    Gives you the ability to connect with investors in real-time via email and to reference past conversations.
  • Effortlessly Calculates Distributions:
    Distributions are automatically calculated, which reduces the risk of human error and makes auditing easy.