If you’re thinking about becoming a real estate investor, you probably already know that there’s a certain amount of risk involved in the industry. Check out these common risks and see how well you’d cope with each.
Common Risks in Real Estate Investing
The most common risks in real estate investing include:
- Market risk
- Replacement cost risk
- Liquidity risk
Here’s a closer look at each.
#1. Market risk
No matter how good someone is at assessing real estate market conditions, there’s always going to be risk involved. The real estate market experiences ups and downs based on things like:
- The economy
- Interest rates
- Inflation
- Market trends specific to certain areas
#2. Replacement cost risk
If you’re making a long-term investment, such as an apartment building, you’ll eventually have to accept replacement cost risk because nothing lasts forever. Even further, you’ll have to accept the risk that another building might pop up in close proximity to yours, making yours less desirable because it’s a better facility and the rent is about the same.
#3. Liquidity risk
You always have to have an exit strategy – but that’s not always easy when you’re in real estate investing. You can’t dictate how many buyers will show up when you want to sell a property, nor can you predict how much those buyers will be willing to pay. That’s partly because you have no control over market conditions (see #1 for more information).
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