You must have heard the phrase, “Higher the risk, higher the returns!” But do you know what the most significant risk associated with investments is? No? Well, it is- Investing without knowing.
You see, investment is just a word. But when you start to speculate:
- By creating a portfolio,
- Understanding bull and bear market trends,
- Doing asset analysis, and
- Making operating plans for growth.
This simple word becomes very complicated. However, as investments are so captivating and engaging, once you start doing it, there’s no going back.
Nonetheless, before you begin understanding the metric of risk is essential, especially in real estate investments. As it doesn’t have any fixed method for evaluating the volatility rate, you can’t assess standard risk metrics by looking at some charts. Every property has unique features. Thus risks related to it are also different.
Thus, there are three crucial factors that you must understand before investing. Are you curious to know what these factors are? We see you are nodding your head!
Market risk
Needless to say that industry/ market trends play a very crucial role in matters related to speculations. Understanding the previous patterns of the market, current situation, and forecasting the trends and changing norms and economic conditions will help you understand the risks.
Besides that, local analysis is also very crucial. There is a possibility that the overall trends are negative, but the value of property located in the area you are interested in is going upward. In fact, it can also vary from property to property.
For instance: Due to Covid-19, the demand for under-construction commercial projects observed a downward trend due to quarantine and work from home scenarios (According to the IMF analysis). However, the residential project observed an upward trend, as more and more people were interested in purchasing houses. (According to the National Association of Realtors, sales of residential projects in the U.S. rose to 24.7%.)
Likewise, you need to understand the market trends from local to national levels before making any decision.
Investment structure
Another thing that you need to consider is the investment structure. In fact, it won’t be wrong to say that it is one of the crucial aspects of real estate investments. Before you put your money, you need to know about the parties associated with the project.
Is it an individual project started by the builder, or does it include any company or trust? Without knowing the answer to this question, you will be making a careless and impulsive decision. And truth to be told, such decisions often lead to loss. We are sure that you don’t want that.
In addition to that, you need to properly evaluate all the other risks and opportunities associated with the property. For instance: Does the project have instant cash recovery, or you need to wait for a long duration. Is there any kind of Underwriting service for the financial model in case of downside scenarios? Is there any information related to the sponsor’s interest- how will they get paid?
All this is a crucial part of the investment structure and needs to be addressed before finalizing the decision.
Property type risk
Last but not least, as there are several types of properties (commercial, residential, vacant, and others), you need to decide about the kind of property to invest in? Right? Well hard to believe the fact, but even if you have the same type of properties, the risk associated with both can vary vastly. As the operating expenses of the property will be different. Besides that, there are also additional costs such as property taxes, maintenance costs, insurance, and other property amenities.
Moreover, the factors such as vacant, lease, or rented property also create a significant impact on the final risk. That’s the reason why you need to do a thorough evaluation of the property and its nearby area. Believe it or not, but all these factors together will help you find a good real estate investment. Not to forget, a good property will also reap numerous benefits.
To sum it all up!
Taking risks to seek growth is a good habit, and everyone should adapt to it. However, it does not mean that you should take risks that can be avoided. In simple terms, the understanding metric is very crucial before putting your hard-earned money in anything. Especially when you are new to investing or when you are trying your luck in a new area of speculation. It will guide you to make a wise decision.
Nonetheless, it will also be beneficial if you take consultancy for better growth.