Bitcoin is a bubble that seems on the verge of bursting. Stocks and shares fluctuate at the whim of an unstable business market. See also, precious metals. The truth, unglamorous as it may be is that real estate is still one of the safest places for neophyte investors to put their money. Is real estate risk free? Absolutely not, but then we’d struggle to think of an investment that is. If you want risk free, saving is absolutely the way forward for you, but don’t expect to reap huge dividends unless you’re saving seven figure amounts.
Real estate, on the face of it, is just like any other form of investment. The trick is to buy for as little as you can and sell for as much as you can. Whether you’re interested in the prospect of flipping a property to make some (relatively) quick money, or earning some passive income by letting the property out to a private tenant, there are ways in which you can increase your chances of turning a profit while mitigating risk. The investment blog at https://highreturnrealestate.com/real-estate-investment-blog/ has some great advice on generating as much income as possible from real estate but for now we’re going to focus primarily on risk aversion. Go into your investment with any (or all) of the following in mind and you’ll find yourself sleeping easier at night…
Don’t over leverage!
If everyone had borne this in mind the collapse of 2006-2008 never would have happened. If you’ve seen or read The Big Short, you’ll know just how over leveraged the market was in the mid noughties. Leveraging refers to the amount of debt incurred in financing an asset. Of course, not everyone can be expected to invest in real estate without a mortgage, but even if you’re able to secure substantial financing on your portfolio, the savvy investor knows his or her limits. The market collapsed because investors were doubling and tripling down on their debts as the flipped multiple properties concurrently. These people were the hardest hit by the collapse, as they found themselves unable to repay their loans as they were unable to find buyers for their properties. The key to mitigating risk lies in keeping your debts manageable.
Look to the future
Gentrification of various urban and suburban boroughs has seen many an investor rubbing their hands together with glee as their property’s value sky rockets. Identifying the next ‘up and coming’ area isn’t easy, nor is it an exact science, but it can’t hurt to do a little homework when choosing the right place to invest, before the area gets too ‘hot’. Look into government urban renewal schemes and renovations. Keep an eye on where the young creative types are moving to (it worked for investors in SoHo and Brooklyn), and keep an eye on the amenities to cater to them. If a trendy restaurant, coffee shop or art gallery opens up in an area you have your eyes on, this is a great indicator that it’s time to pull the trigger. If all of this seems like too much hard work, looking for cheaper areas in close proximity to unaffordably hip areas is also a pretty decent indicator of a good investment.
Up your down payment
The more you have to put into a down payment, the more favorable your mortgage is likely to be, meaning you’ll be paying less in interest rates and gaining more equity. High debt, over leveraged financing can lead to an investment backfiring on you, should the markets take a downward turn. Increasing your deposit insulates you from some of this risk, although you must also be careful not to tie up too much of your liquidity in a property to the extent that it leads to opportunity loss.
Look for below market rents
A wise investor knows all the variables before committing to an investment, and it’s pretty much a given that if you have your eye on an area, you’ll be cognisant of what the average market rate is on rental properties of the type in which you’re hoping to invest. If you can find an area with a significant number of rental properties that are currently below market value, you’re staring at an opportunity for better cash flow (which is always a good sign for an investor).
In these instances, very little is required to bump rental prices up to market rates. A slight upgrade or cosmetic overhaul is usually enough to secure a sizeable return on your investment.
Of course, no investment is entirely without risk, but real estate is one of the few areas in which risk is quantifiably easy to avoid.
FAQs
Real estate debt funds help connect borrowers (often developers) with short-term capital for commercial real estate projects like multifamily buildings, shopping centers, construction loans, and many other property types. Real estate debt funds rose to prominence in the wake of the 2008 crash.
What is the biggest risk to a real estate investment? ›
Real estate investing can be lucrative but it's important to understand the risks. Key risks include bad locations, negative cash flows, high vacancies, and problematic tenants.
Can you use debt to buy land? ›
Broadly speaking, you can use either short-term or long-term debt to invest in real estate.
How does debt allow you to buy a house? ›
Leverage In Real Estate
Debt allows you to amplify your purchasing power and acquire properties that you might not be able to afford solely with your own money. By using other people's money through borrowing money, you can control a larger asset with a smaller upfront investment.
What does debt mean in real estate? ›
Real estate debt is a debt instrument that the borrower is obliged to pay back with a predetermined set of payments. The debt instrument is secured by a specified real estate property as collateral. Real estate debt typically takes the form of a mortgage or deed of trust.
What does debt mean in investment? ›
Debt investment refers to an investor lending money to a firm or project sponsor with the expectation that the borrower will pay back the investment with interest.
What is the biggest threat to real estate? ›
Global unrest, economic uncertainty and eroding home affordability are among the top issues facing the real estate industry over the next year, according to The Counselors of Real Estate's annual report, “Top 10 Issues Affecting Real Estate .” Each year, CRE surveys 1,000 real estate experts to gauge the emerging ...
What is one major problem with investing in real estate? ›
Risk of bad tenants: One of the significant challenges in real estate investing is finding and retaining reliable tenants. Bad tenants can lead to property damage, missed rent payments and eviction expenses.
Which property has the lowest investment risk? ›
However, there is no guarantee that higher risk will always lead to higher returns.
- #1 Raw Land (Highest Risk) Raw land is the riskiest type of investment property, as it has no income until it is developed or sold. ...
- #3 Commercial Property. ...
- #5 Single Family Property (Lowest Risk)
A: Generally, real estate debt is considered good debt because it is backed by a real, tangible asset.
By utilizing debt, money can be borrowed and put towards assets such as property or shares with the potential for creating wealth. This is what's known as 'gearing'. The value of these investments should increase over time, providing greater income and capital growth than would have been spent servicing the loan.
Do millionaires pay off debt or invest? ›
Millionaires typically balance both paying off debt and investing, but with a strategic approach.
What is too much debt to buy a house? ›
Mortgage lenders want to see a debt-to-income (DTI) ratio of 43% or less. Anything above that could lead to the rejection of your application. The closer your DTI ratio is to that percentage, the less favorable your mortgage terms are likely to be. A Home Purchase Worksheet can help you determine your DTI ratio.
Can I buy a house with 100000 in debt? ›
It's not uncommon for a first-time home buyer to have anywhere from $30,000 to $100,000 in student loan debt and still qualify for a mortgage, Park says.
Can you sell your house to pay off debt? ›
Selling your house could free up funds to pay off your mortgage and other debt, but it's not the right move for every homeowner. Before selling your home, consider how much equity you have and what expenses would take away from your overall profit.
Are debt investments good? ›
Debt investments are riskier than most other investment classes, including real estate and wine. If you're looking for private debt investments with a higher interest rate, you'll have to go for companies with a poor credit score, which increases the level of risk.
What is the difference between equity and debt investment? ›
Debt Vs Equity Fund. Debt funds offer stable returns with lower risk, while equity funds have the potential for higher returns but higher risk. Debt funds generate income through interest, while equity funds generate income through dividends and capital gains.
What is the difference between equity and debt real estate investing? ›
Equity real estate investing earns returns through rental income paid by tenants or from selling property. Debt real estate investing involves issuing loans or investing in mortgages or mortgage-backed securities.
What is the difference between debt investment and bond investment? ›
Debt mutual funds are not strictly fixed-income products. They do, however, invest in fixed-income securities. Returns fluctuate according to the market price of the underlying assets. Bonds are fixed-income products.
