Real estate investments are a lucrative pursuit, but they also come with risks that can cause serious financial loss. For example, if you can’t generate enough income from rent payments, your property could end up in foreclosure. Interest rates can also rise, which will decrease your cash flow and increase your debt.
Still, investment properties can be highly profitable when the risks are properly managed.
Here’s the inside scoop regarding how the best investors do it, so you can apply their wisdom to your own investment strategy.
1. They diversify with private investments
There are many ways to diversify an investment portfolio, and private investments are one of the best. Turnkey property site, Invest.net says, “True diversification includes assets outside the public sphere. Assets that perform independently of public markets help investors diversify returns without heavily increasing risk.”
For this same reason, many investors also look to internally curated investments that are often overlooked, including opportunities in typically boring market segments and geographies. This usually requires outside help from investment experts, and it’s worth pursuing.
2. They perform detailed market research
For commercial property investors, market analysis plays a central role in the property selection process. Market research includes the following:
· Looking at occupancy and rental rates, along with submarket absorption trends to gauge baseline performance expectations. This baseline provides a reliable way to track progress.
· Analyzing demand drivers for each property type. For instance, demographics, infrastructure, and employment opportunities.
· Estimating an increase in future supply by monitoring permit filings for new developments.
· Strategies to attract tenants from a variety of industries.
In-depth market research helps investors avoid risky opportunities that don’t show any promise, and increases the ability to select good investments.
3. They have a risk management plan
Anyone investing in real estate without a plan is sure to fail. A plan will outline your goals and the path you will take to get there. It will also outline contingencies for certain situations that may arise that you’ll need to deal with along with preventive actions.
A good risk management plan will be flexible enough to evolve as your portfolio grows, and can be altered to address key changes in the market. For example, a plan might include offering tenants shorter lease terms when tenant demand is low.
4. They maintain their properties
The importance of regular property maintenance can’t be understated. A property left in disrepair is a huge financial risk that goes beyond just the building itself. It can present safety hazards that turn into injury lawsuits or code violations that can generate hefty regulatory fines.
Being proactive about maintenance is easy by scheduling routine, annual inspections and keeping a list of preventive upkeep tasks to perform each season.
5. They carry property insurance
Property insurance won’t cover everything, but it will cover some financially devastating losses that internal protocols can’t prevent. From property damage to disrupted business activity, and even cybersecurity attacks, carrying the right types of property insurance is a crucial part of every risk management strategy.
6. They keep cash reserves on hand
Since a property can take months or years to sell, owning real estate carries a liquidity risk. You can’t easily or quickly convert properties into cash, so the only way to cover yourself if you need more cash flow is to have some cash reserves available at all times.
7. They evaluate each property individually
Each potential asset comes with its own set of risks, and evaluating each property in detail is a crucial aspect of risk management. For example, this includes analyzing physical attributes, usage patterns, and the credit health of any existing tenants. It’s also good to review the market for competition and think through potential scenarios, including how you’ll respond if an incident occurs.
Risk management is ongoing
The real secret to building wealth in real estate isn’t just finding the right properties and getting good tenants; it’s mostly about managing risk and pursuing the best opportunities at the right times.
Being prepared to avoid, mitigate, and manage risk is one of the biggest factors that contributes to a real estate investor’s success. It begins with analyzing markets and being conservative with finances, but it also requires physically maintaining assets and monitoring their performance over time.
Risk management is an ongoing process, and investors are always tracking their progress and success to ensure maximum profitability now and in the future.
