Across many countries, real estate is the most valuable asset class, accounting for a significantly higher share of people's wealth than any others. Part of this can be attributed to the perceived simplicity of the physical asset: everyone lives in a house and has an understanding of residential properties, and a few high net-worth individuals also feel comfortable with passive real estate investing.
Real estate appears to meet all the criteria, but not all investors are as fortunate with the returns on their investments. Some property investors are able to brag about their sizable profits, while others have less uplifting tales to share.
Here are some strategies an investor can use to reduce risk in their day-to-day operations and increase the likelihood that a passive real estate venture will produce a predictable return on investment.
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It is very important for passive investors to have a sound risk management process because it helps them identify all threats and find solutions for them.
In risk management, identifying all of the property's potential risks is one of the most important steps. It depends on the class of property that you invest in as well as the methods you employ in investing that will determine the risk tolerance you should manage.
Identifying all potential risks makes finding solutions and mitigating them easily. Real estate investors can also use risk management to identify potential defects in the property and eliminate them one by one to enhance its value once they decide to sell them.
Risk management includes assessing and managing the property and planning for any eventualities that may arise. It is crucial that you assess all possible risks based on the potential loss you may incur if they happen, as well as the need for immediate action.
You will be able to plan your finances and maintain your rental income flow more effectively when you identify and assess your risk.
Active investors often turn to real estate to earn passive income, build wealth, and diversify their portfolios. There are, however, risks associated with it, as with any other investment strategy. By practicing effective risk management, passive investors can mitigate these risks.
The availability of digital information today makes it easy to gain an overview of other markets and cities and learn about the overall market before investing in a property. In a highly cyclical industry like real estate, one's investments should be timed and placed to reduce risks and maximize returns.
By maintaining a wide perspective, real estate investors will avoid losing thousands of dollars when making investment decisions.
Real estate investments are best made in cities where taxable incomes and populations are rising, but property prices are not too high compared to current incomes. A city that has a track record of a slower growth rate than its nominal GDP is likely to have an underperforming investment. Furthermore, if current prices are excessively high, future returns will not be good.
If passive investors want to make a predictable passive income on their investment, they should look for cities that are growing quickly, have a lot of high-paying white-collar jobs, and have reasonable property prices and rental rates.
In order to make micro-markets less risky, it is important to ensure that investment properties are located in areas that have good sociocultural infrastructure, such as schools, shopping centers, and hospitals.
Additionally, investors should be aware that while well-established regions may be less risky, they may also provide smaller returns. On the other hand, up-and-coming locations with planned infrastructure might offer better returns, however, they may take longer to realize profits.
There are different risk exposure associated with different sub-asset classes in real estate, and they may perform differently in different locations. For example, in commercial real estate, Grade A offices in high-demand areas tend to have lower risk than retail and hospitality buildings.
Due to tenants' long-term plans and requirements in commercial real property, vacancy rates are typically lower. In the retail and hospitality industries, seasonal consumer trends and occupancy have a direct impact on revenues, which makes it harder for investors to predict their performance and level of risk.
Because of its lower ticket sizes and lower potential vacancy periods, the residential sector is perhaps a safer place to invest. It's worth noting, however, that while rental properties have relatively low minimum investment capital and lower vacancy risks, it is accompanied by lower rental yields.
The price of real estate is relatively high, and it lacks the liquidity of other financial assets like the ones in the stock market and mutual funds.
Consequently, investors should understand their own financial situation and plan for a holding period that is comfortably longer than the anticipated completion and exit dates of the passive activity.
You may need some time to determine the right price to sell your rental property at, especially if you keep in mind the prevailing demand and supply in a particular area. It is also imperative to factor in unprecedented events such as inflation or pandemics in order to give the asset enough time to perform in any situation.
Diversifying your real estate portfolio can reduce the risk associated with this type of investment. By investing in a variety of property types and markets, you can reduce your exposure to any one specific market or class of property.
This is important because real estate markets can be influenced by a variety of factors, such as economic conditions, changes in local laws and regulations, and fluctuations in property values.
By spreading your investments across different markets and asset types, you can reduce the impact of any one investment underperforming, as the losses in one area can be offset by gains in another.
There's no doubt that real estate is a massive asset class and that its popularity with investors is well deserved. By exercising due diligence and prudence before investing, an investor can benefit from this asset class's safety, security, and low volatility without taking on unnecessary risk.
Do you want to learn how passive investing can benefit you in multiple ways? Our real estate professionals at Saint Investment Group are here to assist and inspect every property we select for investment thoroughly, giving you greater security and potential returns as a property investor.
Our experts can help you come up with good risk management in passive real estate investing. To learn more, contact us at 949-881-7128 at Saint Investment Group today!
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.
