When you read about real estate investment online, overwhelmingly, you’ll read about the positives. This is mostly because there are plenty of positives; real estate investment is generally considered to be a good idea, and could be just what you need to secure your finances for the future.
However, there needs to be some balance to this endless good news. Nothing in life is ever 100% perfect, and real estate is certainly not going to buck that trend. There are downsides to the real estate business, but that shouldn’t be enough to turn you away from the industry— it just means that you need to be fully prepared for how to cope.
In an effort to help you do just that, read on for a full guide to the potential issues that real estate investment can throw at you— and you can then consider yourself forewarned, and able to cope with anything.
#1 – Unexpected maintenance fees for your property
Making your way in real estate is all about managing your money. You have to buy at the right price, renovate for the right price, and rent or sell on for the right price. This means that you have to calculate your margins absolutely, and if there is even the hint of a missed expense, then you’re going to throw off your entire profit.
However, it’s incredibly easy to miss expenses within your real estate calculations. The fees involved in owning property aren’t always simple, and there could be a variety of additional costs waiting for you once you have completed on the sale. Here’s an overview of some of the most common:
Fees to a Homeowner’s Association can be a nasty surprise, as can condo insurance; or service and janitorial charges. No matter what kind of building you own, there’s every chance there’s an additional fee for service-related work. There’s nothing wrong with these fees, of course — they provide essential services, after all — but you have to ensure you’re aware of them when performing your initial calculations.
If you’re going to be renting your property, landlord insurance is a must. This can be costly, so it has to be factored into your margin.
It’s also worth a reminder that you will have to pay property taxes on any real estate investment you make. It’s surprising how many investors forget to budget for this, so make a note to ensure you’re aware of your exact obligations before you sign on the dotted line.
#2 – A lack of tenants
One of the most surprising costs you will encounter when investing in real estate is the cost of a lack of tenants. It is inevitable that this will occur to you at some point; more often than not, there is a lag period between the last tenants moving out and the next tenants moving in.
During this period, you will have to cover all of the costs of the property. That means you’ll have to pay the mortgage, the fees, the water rates, the electricity— everything. What’s more, you’ll have to keep paying them for as long as the tenant-free situation continues.
It is therefore vital that you build a contingency fund that can be used during times when you cannot find a tenant. The fund needs to be fairly substantial; in a difficult market, it could be as long as six months before you’re able to find new tenants for your property.
This measure ensures you do not need to accept less-than-stellar tenants, or tenants at a discount rate, just to continue to pay your bills. While it may take you awhile to save for a complete fund that can cover your costs for half a year, whatever you can contribute is preferable to just hoping for the best.
#3 – A buyer’s market
Ah, the real estate market. It’s tough to make sense of the real estate market; it rises, it falls, it stays the same, it rebounds… and often for reasons incomprehensible to the average person. Nevertheless, the housing market is something you have to become deeply acquainted with if you’re going to invest in property.
In some scenarios, the market might be your best friend. If the market rises, then you’ll generate a far higher profit than you had initially calculated. This is always a pleasant situation, and it’s one that many real estate investors actively look forward to and hope for.
However, as the old saying goes: what goes up must come down. On the flip side of those profit-boosting housing market peaks are the troughs that can cost you a substantial amount of money; especially if you find yourself in a buyer’s market.
For the uninitiated, a buyer’s market is a market where there are more properties than buyers. As a result, house prices begin to fall, and buyers are able to get more bang for their buck. The term is also something of a misnomer, as the same circumstances impact the rental market too, and rents begin to fall as landlords almost begin to compete for available tenants.
This kind of falling market is difficult enough for standard residential homeowners to deal with, but for a property developer, is has the potential to be outright catastrophic. It is therefore essential that your calculations are flexible, and you can — if necessary — “dig in”. Essentially, this means waiting as long as it takes for the market to rise again; it’s expensive but, ultimately, is the best way to protect your investment.
Real estate is an incredibly beneficial method of both making money and investing in your future. However, it is not without its foibles, and being aware of these potential issues is essential if you are truly considering investing your cash in the real estate market. As has been made clear by the above, one of the key components to successful real estate investment is reliable savings that can cover you if you when things don’t quite go as expected. With these in place, you should be well equipped to negotiate the heady world of real estate.