8 Risks of Property Investment: How to Avoid?
For you who want to generate income in Bali, property investment always offers a promising profit with a high yield of ROI. However, as an investor, you need to watch out for risks of property investment. If you understand what real estate investment risks are, you can avoid and minimize the negative impacts it might cause.
This article covers the causes of property investment risks and how to avoid all of them. Let’s find out!
8 Risks of Property Investment and How to Avoid?
Here are 8 risks of property investment you must know, as follows:
1. Property Risk
Property risk can be caused by two factors – natural (earthquake, flood, landslide, hurricane, etc.) or unnatural (caused by people, either unintended or maliciously).
There are some ways to minimize this kind of risk, such as:
- Buying trustworthy building insurance to help you to protect your property.
2. Market Risk
This type of risk refers to unpredicted property or real estate market. There is a possibility that the property’s price may fluctuate and cause investors to struggle to understand the property’s projection.
Property market trends always go up and down by many factors. So, if you intend to invest in property, you should update on property price fluctuation.
Besides that, there’s a term called “property depreciation”. This means your property value decreases over time.
For an investor, how to avoid market risks of property investment?
- Broaden the variety of properties in your portfolio.
- Try to research to find a property that is below the market price. It provides a safeguard in case the market slumps caused by external factors.
Property business demands are not always constant. As an investor, you are not always can to rent your property out. This naturally occurs in the property management life cycle.
Many factors influence tenants when they are searching for a property, such as:
- Area growth (construction of public facilities).
- Economic growth.
- Government policies.
- Property trends and prices (market changes).
- Your service to tenants.
One of the risks of property investment is that no tenant rents out your property for a certain period.
Here are the best strategies for minimizing the risks associated with vacancies, as follows:
- Buy and invest property in a growing area that provides various public facilities like schools, hospitals, parks, shopping centers, public transportation, and tourism destinations. BVR Property provides you villas and lands that you can get through leasehold or freehold.
- Better to buy property that is located near the main road.
- Ensure an ample financial buffer to prevent if you fail to find suitable tenants instantly.
- As market trends change, you need to be flexible when setting up your expectations.
4. Interest Rate Risk
If this type of real estate investment risk increases, it will increase the monthly repayments as well. In other words, it harms your property investment.
How to minimize interest rate risk?
- Practicing prudent cash flow management.
- Choosing fixed-rate mortgages.
5. Unprofessional Tenants
Having bad tenants is one of the risks of property investment. They can give your property investment a negative impact. Undisciplined payments, property damage, or complaints from neighbors are examples.
And an investor, here are the ways you can practice to minimize the risks of unprofessional tenants:
- Have competitive but not excessively low rental rates.
- Conduct regular property inspections during the tenancy.
- Have a trustworthy insurance.
- Choose an experienced and professional property manager to help you avoid unfavorable tenants.
6. Bad Location
Location, location, and location. The first consideration for everyone who wants to buy a property or choose daily rental is location.
This is natural because the strategic location offers easier access to public services and transportation. If the property is located in a bad location, it will be harder to fulfil the market’s demands and generate income.
How to avoid choosing a bad location as one of the risks of property investment? Do research regarding the area where the property is located (facilities and access).
7. Lack of Liquidity
Lack of liquidity is the risk that the property’s value is below market and forces investors to sell their properties at a rock-bottom price. Property investment is best for long-term returns. So, you must set a projection and goal in your investment for the next 10-30 years.
The solution to this problem is not easy. Here are the ways you can minimize lack of liquidity, such as:
- Maintain liquidity in your property investment portfolio.
- Think that property is a long-term investment. You must have solid goals in your investment. This kind of investment isn’t a good idea if you want a short-term investment.
8. Negative Cash Flow
Negative cash flow is one of the most common risks in all types of businesses and investments, including property. This condition can lead you to lose money because your expenses (insurance, taxes, and mortgage payments) are higher than your income from your rental business.
Negative cash flows are caused by poor property investment analysis and research. So, the solutions to solve negative cash flow as one of the risks of property investment are:
- Forecast your income and expenses.
- Build a strong property portfolio.
- You can consult a professional property strategist to help you manage the cash flow.