The Business of Property – Why It’s Not Something to Set and Forget
It’s well known that real estate is an excellent asset in which to invest – particularly when the market in your chosen territory is strong.
However, as with almost any investment, adjustment and maintenance are key to ensure the best possible return and to avoid losses.
There are many reasons why this is the case. Read on for just a few of those, along with basic techniques you can use to avoid risk as effectively as possible.
Potential Cash Flow Issues
The property you’ve managed to obtain may feel like a steal at first sight, but if it incurs significant expenses in the long run, your profit margin can diminish very quickly, and may fall into negative numbers.
For example, upon closer examination, a simple fixer-upper or a property found at auction may present major structural issues – the rectification of which might cost you far more than you could hope to make from resale.
If you’re planning to let a property out, you need to make sure it is occupied constantly – or at least very regularly – to avoid losing money from it.
For this reason, it’s vital to clearly determine the true value – and potential – of a property before you make the investment.
The amount you charge for rent, too, is a difficult one. If it’s too expensive, tenants may avoid it and go to the more affordable properties in the area. If it’s too cheap, you won’t be able to make ends meet.
You need to stay on top of what other landlords are charging and carefully calculate where your property should be positioned within the local and national rental markets. If you need to make adjustments, any tenants in residence should receive enough notice of this.
In addition, look out for bad tenants who don’t pay on time or cause major maintenance issues, as this will eat significantly into your cash flow too!
Market Fluctuations
The property market can be volatile. While there tends to be a constant upward trajectory in terms of house prices, crashes can – and do – occur. For this reason, it’s vital that you stay abreast of changes in property values.
Plan for the worst case scenario and try to look out for signifiers of a crash, stagnation or any other negative movement in the market way before they have a tangible effect. By being prepared, you may be able to put in motion certain tactics to negate the worst effects.
Illiquidity
Property is not a liquid asset. It’s a challenge to offload it quickly if it’s losing you money. Selling a property takes enough time when you’re the only owner and resident – and it can be even more of a challenge when there are sitting tenants.
You may be forced to place the property on the market for a significantly reduced asking price if you need to get rid of it fast – although homes, commercial buildings or those sold collectively as a portfolio that are “too cheap” can be viewed with suspicion by potential buyers.
At any rate, if selling speed is essential, it’s likely that you’ll make a loss – or minimal profits at best. That’s why it’s vital to ensure that any property you invest in is extremely likely to provide you with a good return whatever the weather.
You should also look into equity loans and other means of finance for a quick payout, just in case.
Location Factors
It’s difficult to predict how property will move in a particular location over time. Many investors seek out neighbourhoods that are “on the up”, which means they can buy property there on the cheap, renovate it, wait for the market to rise and then sell it for the best possible profit.
However, there is always the potential for local regeneration projects to falter – or to never get off the ground in the first place.
Local market crashes can also occur. For example, if a large major employer moves its base from the town in which you’ve invested, you may see satellite businesses closing down and a drop-off in house prices.
Landlords may also struggle to attract as many tenants there as they used to.
These are all factors to keep in mind when hunting for an area in which to invest in property.
If you’re planning to make a new real estate investment, it’s important to first take the above matters into consideration.
Once you have contingency plans in place to keep your investment strong and profitable, the potential risks discussed in this article may cause you less trouble should the worst happen.
