Is Real Estate Investing A Good Decision And Risk Free?
In the past decade, real estate has ranked as the top investment pick for many Americans. That puts real estate ahead of stocks and mutual funds, savings accounts and certificates of deposit (CDs), gold, and bonds as the most favored investment.
It may be the top investment pick, but is real estate investing risk free? Just like any investment, real estate investing has risks, and there is always the potential for property owners to lose money if their business plan isn’t thoroughly executed. Below are some risks to think about when you’re investing in real estate and how Blue Skies Equity works to avoid them.
Location, Location, Location
Location should always be your first consideration when buying an investment property. After all, you can’t move an apartment building, office building, industrial or warehouse building or self-storage facility to a more desirable location. Location ultimately drives the factors that determine your ability to make a profit. The demand for multi-family properties or any asset class will depend on its location. A good location will create the highest demand, best tenant pool, higher rental rates, and the greatest potential for appreciation. In general, the best location is the one that will generate the highest return on investment (ROI).
Cash Flow
Cash flow on a real estate investment refers to the money that’s left over after paying all expenses. Negative cash flow occurs when the money coming in is less than the money going out. The main reasons for negative cashflow are high vacancy rates, improper debt financing, high maintenance and capital expenses, and not properly estimating insurance premiums and property taxes.
Vacancy Rates
Whether you own a multifamily building, self-storage facility, industrial or office building, you need to fill those units with good tenants to generate rental income. Unfortunately, there’s always the risk of a high vacancy rate in real estate investing. Many factors can come into play: undesirable location in the community, bad property management staff, loss of a large employer, and/or declining population.
Problem Tenants
High occupancy pays the bills, although problem tenants can create additional issues. We like the saying, “No tenant is better than a bad tenant.” Common problems with tenants include those who:
- Don’t pay on time or don’t pay at all (which could lead to a lengthy/costly eviction process)
- Cause damage to their unit or to the property
- Don’t report maintenance issues
- Disrupt other tenants in the building
How does Blue Skies Equity minimize the risks of real estate investing?
At Blue Skies Equity we strategically partner and align ourselves with other reputable real estate operators to minimize the risk to us and our investors.
We focus on high growth markets by doing our due diligence and conducting a thorough real estate and market analysis of the area. In our target market, there is job diversification and appropriate amenities like health care, public transportation, shopping and good schools.
In order to own a cash flowing property we must first conduct proper due diligence prior to purchase. We take time to accurately and realistically calculate the income and expenses. Not only do we do our own analysis, but we work closely with property managers and vendors to ensure our underwriting is not only accurate but conservative. After the property is purchased we work closely with the property manager to ensure occupancy is high, and the expenses are kept in line, and we have great tenants. Close communication with the property manager eliminates the risks and ensures the business plan is being met.
The Bottom Line
Just as with other types of investments, real estate investing can be risky. However, real estate has traditionally been considered a sound investment, and savvy investors can enjoy passive income, excellent returns, tax advantages, diversification, and the opportunity to build wealth.
As always, please reach out if you have additional questions.
Thank you,
The Blue Skies Equity Team
