4 Biggest Risks of Real Estate Investing in 2023 and How to Minimize Them - ColoradoBiz Magazine (2024)

FAQs

What are 4 of the major real estate risk concerns? ›

“Continued inflation, overall higher interest rates, a potential recession and geopolitical tensions will force 30-year and 15-year mortgage rates up throughout 2023, and will bring the two rates closer together as short-term risks rise,” says Dennis Shirshikov of real estate website Awning.com.

Key risks include bad locations, negative cash flows, high vacancies, and problem tenants. Other risks to consider are the lack of liquidity, hidden structural problems, and the unpredictable nature of the real estate market.

Despite what some may think, 2023 is still a good year to invest in real estate, thanks to advantages like long-term appreciation, steady rental income, and the opportunity to hedge against inflation. Mortgage rates are expected to decline, but the housing market is likely to remain competitive due to low supply.

They expect home prices to improve in Q3 & Q4 this year, over in 2023 they expect the medium home will delince 5.6% compared to 2022, to $776,600 in 2023 ($822,300 in 2022). They had predicted a median 2023 price of $758,600 forecast last October.

Demand for homes remains high, and there are fewer home sellers than there were in 2022. And while the market is cooling, experts don't expect an actual housing crash or a housing bubble burst in 2023. Will there be a housing market crash in 2023? It's highly unlikely that the housing market will crash in 2023.

Flipping houses has been extremely profitable for the past decade, but 2023 should see the market tightening up quite a bit. With demand sagging, rehab costs going up, and days on market doubling or even tripling, house-flippers have a little tougher path to profitability than before.

Which is generally the riskiest real estate strategy? ›

Opportunistic is the riskiest of all real estate investment strategies. It is also synonymous with 'growth' in the stock market, like 'value-add,' but it is even riskier. Opportunistic investors take on the most complicated projects and may not see a return on their investment for three or more years.

Potential for Negative Cash Flow Risk: Like many other investments, real estate has the potential to create losses. Whenever you complete a deal with less money than you started with, you've created negative cash flow. And too much negative cash flow can leave you broke.

U.S. equities may disappoint in 2023, but patient investors can find potential income and returns in other markets. A grueling bear market, touched off by decades-high inflation and an aggressive Federal Reserve response, made 2022 one of the most challenging years for investment returns in the last half century.

Economic factors, such as inflation, have a direct impact on the real estate market. As with other goods and services, real estate prices may rise alongside inflation. This is due to the fact that real estate is commonly considered a safe and stable investment that can be used to combat the effects of inflation.

4C's risk management services encompass each phase of the risk lifecycle – identification, analysis, evaluation and treatment – and integrates risk with business continuity and crisis management to ensure organisation-wide resilience.

Perform regular safety inspections. Assessing the overall safety of your workplace and/or vehicles on a regular basis will help to ensure that any hazards are identified as soon as possible so risk can be managed effectively. For some types of insurance, this may be required, but it's good practice even if not.

There are five categories of operational risk: people risk, process risk, systems risk, external events risk, and legal and compliance risk.

What are the 4 areas of risk assessment? ›

Although home prices are expected to improve in the second half of the year, the California median home price is projected to decrease by 5.6 percent to $776,600 in 2023, down from the median price of $822,300 recorded in 2022.

With mortgage rates declining faster than expected, home prices are likely to remain mostly flat throughout 2024. This will be good news for buyers who have been waiting on the sidelines for a good time to enter the market.

Along those lines, organizations like Fannie Mae and the Mortgage Bankers Association forecast that the average rate on 30-year fixed-rate mortgages will decline throughout 2023, continuing into the first quarter of 2024.

If you need to be occupying your home by a certain date to save on rent, it's a much better deal to close at the end of the previous month (for example, January 30) instead of the beginning of the current month (February 1).

Before a recession hits, home prices are typically at an all-time high. This means that selling your home before a recession will result in a higher profit between the purchase price of the real estate and the sale price, which can increase your capital gains taxes.

As prices become unsustainable and interest rates rise, purchasers withdraw. Borrowers are discouraged from taking out loans when interest rates rise. On the other side, house construction will be affected as well; costs will rise, and the market supply of housing will shrink as a result.

How much profit should you make on a flip? On average, a rehabber shoots for a 10 to 20% profit of the After Repair Value, but it varies depending on the market and the specific project risks. A 10% profit would be on the lower end, and a 20% profit would be considered a 'home-run' by most rehabber's standards.

ATTOM has measured house flipping activity since 2005 and found that the practice was most profitable, in pure dollars, in 2021 — when investors pocketed an average $70,000 per property.

Utah and Missouri establish themselves as the best places to flip houses in terms of low remodeling costs. New Jersey, meanwhile, has the lowest rental vacancy rate. West Virginia boasts the highest homeownership rate in the US and the lowest housing costs.

Why is real estate not the best investment? ›

Even after buying the property, you have to pay property tax, society maintenance, pay for repairs, etc. Moreover, if you have rented your property, there are chances of damage to the property, which is an added cost to you. All these expenses do not make real estate a good investment option.

Buying a house gives you ownership, privacy and home equity, but the expensive repairs, taxes, interest and insurance can really get you. Renting a home or apartment is lower maintenance and gives you more flexibility to move. But you may have to deal with rent increases, loud neighbors or a grumpy landlord.

High Cost: The biggest disadvantage with real estate investment is the high capital requirement. To get started, you need to provide for down payments, EMIs, insurance, property taxes, stamp duty and so on.

Rental Homes

This option is ideal for new investors, especially if you've been a homeowner before. Getting started isn't so different from buying a home, and if you're moving, you can even rent out your old home instead of selling. This is a great way to make the transition, since you already own the property.

Development. Development is the riskiest of all asset classes. Typically, developers are buying vacant land, but may also buy existing properties with the intent to demolish the existing structure and build something new. Returns for developments are created through forced appreciation.

The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.

Chasing performance, fear of missing out, and focusing on the negatives are three common mistakes many investors may make. History shows investors who overreact to near-term market events typically end up doing worse than if they stuck to their long-term plan.

Property Location

The adage "location, location, location" is still king and continues to be the most important factor for profitability in real estate investing. Proximity to amenities, green space, scenic views, and the neighborhood's status factor prominently into residential property valuations.

Unrealistic Expectation of Profit

Although real estate investment may be very lucrative, success doesn't happen overnight. Investors who rush into things or don't generate a lot of money right away rapidly get frustrated and overwhelmed. Building your portfolio and network takes time.

Should I move my investments to cash 2023? ›

The answer is no, according to advisors and investment analysts. "Allocating more funds to high-yielding CDs, money market funds, or treasuries may seem prudent; however, this is a form of market timing and should be avoided," explained Jonathan Shenkman of Shenkman Wealth Management.

“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago. Some of the most successful entrepreneurs in the world have built their wealth through real estate.

Holding long-term fixed-rate investments, such as long-term bonds, fixed annuities, and some types of life insurance policies, during inflation can be bad because their returns may not keep up with inflation.

Rental income: Real estate investments can provide a steady stream of rental income, which can also help beat inflation. Rents tend to increase over time, particularly in areas with strong job growth and population growth. This means that rental income can also increase over time, providing a hedge against inflation.

Negative cash flow is one of the most common risks for property investors. If you don't conduct your real estate market research and analysis, you could end up losing money. Negative cash flow occurs when your property loan payments, taxes, and other associated expenses exceed your rental income.

What are 3 examples of property risk? ›

Slips and falls, drownings, and assaults and other security issues often result from negligent property maintenance, unprotected slip hazards, elevator or escalator malfunction, and inadequate security. These real estate risk exposures apply to all types of properties whether residential, commercial, or mixed-use.

They are Deloitte, EY, KPMG and PwC. Each provides audit, tax, consulting and financial advisory services to major corporations.

Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities. Another disadvantage of property investments is that they are not easy to liquidate.

A measure of risk is said coherent when, in mathematical terms, it possesses 4 important properties: positive hom*ogeneity, translation invariance, sub-additivity and monotonocity.

Risk avoidance is refusing to take part in an action that is viewed as too risky. For example, a property manager may decide not to purchase any property with a pool to avoid associated risks.