Like any investment, buying real estate does not come without risk. And while there is certainly plenty of opportunity to generate a decent profit, there are times when things might invariably go south. Understanding these potential pitfalls is the key to protecting yourself against them, or at least mitigating your potential damages. Let’s explore three specific ways to fortify your investment against risk and steer your portfolio away from many of the hidden troubles of real estate investing.
Buy in different locations.
One great way to protect your real estate investment portfolio against possible market downturns is to expand outside of one single area. Not all locations will necessarily be impacted by the overall economy. Moreover, there is typically greater risk of downturn at a local level. If all of your investment properties are situated in one geographical area, and that area starts to experience economic decline, you’ll be at much greater risk than you would be if you had only a small portion of your portfolio there.
Furthermore, by expanding into other locations, you’ll also have the opportunity to tap into some of the hottest markets. And thanks to new technologies and solutions like property management software, managing an expansive portfolio of properties has never been easier.
Look for untapped value.
If you have any experience in real estate, you’ve probably heard of the term “value investing.” This primarily means investing in properties that are priced below market value. Unfortunately, this isn’t always an option. In fact, as is currently the case, there are times in the market when properties are not only undervalued, but are actually selling for far over asking price.
The good news is, there are still ways you can leverage this concept, even if you can’t locate properties selling for less. For instance, purchasing a property with rental rates that are lower than the current market rate is one option. In this case, you could increase rent to something that’s more in line with the going rate, instantly improving your cash flow and further protecting your investment.
Another option is to look for properties that could benefit from some basic improvements or add-on services. Oftentimes, investing even just a small amount into a new property can dramatically increase its overall value, tenant appeal, or both.
Last, but certainly not least, there is the age old adage of not putting all of your eggs in one basket. For instance, there are times when the residential housing market may experience downturn but the commercial market remains steady, and vice versa.
The more you can spread out your risk to various different types of properties, the less vulnerable your portfolio will be to market fluctuations and other economic situations. If you’re unsure or not comfortable with expanding into new real estate segments, hiring an experienced property manager to oversee that portion of your portfolio may be worth it.
Doing business in any industry comes with some degree of risk, and real estate is certainly not exempt. In fact, if you’re not careful, you could easily end up upside down. Be strategic about how and where you invest. In doing so, you can mitigate your risk, protect your investment and successfully navigate your way out of just about any circumstances.