The Economic Times defines investment risk as the probability of occurrence of losses relative to the expected return on any particular investment. In a Property Management SF perspective, it’s basically, the degree of variability between the actual and expected return from an investment in real property. Risk is very important when evaluating the viability of any investment. Your risk taking propensity determines the nature of investments you go for. But it’s important to strike a good risk – return tradeoff.
One thing I have noted as Property Management SF expert is that because people don’t buy real estate frequently, it’s often difficult for them to understand the nature of risks inherent in such investments. Risks occur in many different ways at every stage of real estate investment and may include overpayment at purchase, fraudulent sale, building component or system failure, the economic downturn, market decline, fire, flood and personal injury among others. Usually, the major, cause of failure in real estate investment is the possibility of going into negative cash flows for an unsustainable period of time, forcing you to resell the property at a loss or go into insolvency.
If you are thinking about allocating some funds to invest in real estate, there are several options available in the market and each option has its own risks. Consider consulting a Property Management SF expert to help you understand the kind of risk each option exposes you to before you take the plunge.
Here I discuss a few real estate investment options and their risks:
Individual Direct Ownership
This type of real estate involves buying a property on your own and handling everything including leasing, management of the property and maintenance. You can also hire a Property Management SF to do the job. The risk inherent in this kind of investment is that there is a possibility that you can; make poor financial decisions, get bad tenants, encounter management problems, and lose money on the sale of property.
Here, you can partner with a group of likeminded investors, but as a Property Management SF expert, I’ll advise you to know your partners well in terms of their financial position, work ethics, motivation and management philosophy. Consider hiring a property manager to handle the management of the estate. Apart from being exposed to all the risks involved in individual ownership, you may also end up with partners who have divergent positions on renting, managing, and improving the property.
General or Limited Partnerships
These include private Real Estate Investment Trusts (REITS) and tenant-in-common investments. It is basically entrusting someone with your investible funds. There is always a high possibility of getting a fair return on your investment with these investment vehicles. Usually, the main risk is that many investors don’t undertake basic due diligence on the sponsor, and even for those who care to, it’s often hard to do so. It’s also possible to end up with unscrupulous sponsors, low investment returns, loss of investment and personal guarantees and liability.
Publicly Traded Real Estate Investment Trusts
This involves investing in a big company undertaking a business of buying and owning property. Your success with a REIT is based upon the Property Management teams ability to make sound financial decisions. There are many highly reputed REITS with long term operating histories and audited financial accounts. With REITs, you get experienced management, liquidity in selling your shares, and limited liability. The main risk involved is that there is a real possibility of losing your entire investment. Additionally, shares and company value are subject to stock market fluctuations, and this may reduce the value of your investment even if the company is well managed.