Norada Real Estate Investments

Real Estate Housing Recession: How To Make it Work For You?

by

Real Estate Housing Recession

We are currently experiencing a looming real estate recession in this country. Property prices in some areas have started falling in some housing markets, especially those which experience a boom during two years of the pandemic. In late 2022, the Consumer Price Index showed that inflation had slowed for the second month in a row, which was certainly welcome news.

Nonetheless, we expect the Federal Reserve to continue to closely monitor wage growth metrics, which have historically been more difficult to predict, in order to determine how long it should maintain its restrictive stance. With a recession expected to begin in the first quarter of 2023, one plausible scenario is for the Federal Reserve to reduce the federal funds rate in mid-to-late 2023. However, given the Fed's recent statements, we believe there is a significant upside risk to the Fed keeping interest rates higher for longer.

“The wild ride known as the U.S. housing market slowed dramatically in the fall of 2022, as mortgage rates surged and home prices remained high,” said Molly Boesel, principal economist at CoreLogic. “Home sales started off strong in early 2022 but took a nosedive later in the year. On the plus side, generous amounts of home equity will protect many borrowers from experiencing the type of foreclosure activity seen during the Great Recession.”

Home Price Growth Declined Significantly Between Spring and Fall

According to data from CoreLogic’s monthly Home Price Index, U.S. year-over-year home price growth reached 20.1% in April 2022, the highest level recorded in more than two decades. However, appreciation has tapered off every month since, falling to 8.6% in November. Sun Belt states led the nation for annual home price gains for most of the year, most notably Florida, which posted the highest gain in the country from February to November.

This trend partially reflects Americans migrating from more expensive areas in the West to more affordable areas of the country, though price growth in southern states has followed the national trend and slowed in recent months. The year’s spike in interest rates is the primary factor in moderating home price growth, with Freddie Mac data putting 30-year fixed-rate mortgages at 3.22% in early January 2022 compared with a yearly high of 7.08% in mid-November.

Despite the slowdown, a major downturn is unlikely due to a shortage of available homes for sale, strong mortgage underwriting standards, and an unemployment rate that has returned to pre-pandemic levels. The strong home price growth in 2022 led to robust home equity gains across the country for nearly two-thirds of American homeowners with a mortgage.

CoreLogic’s quarterly Home Equity Report shows that in the first quarter of 2022, borrowers gained a collective $3.8 trillion in home equity since the first quarter of 2021, a 32.2% increase. During that period, US homeowners with a mortgage gained an average of $64,000. But since home price growth is the primary driver of equity growth, increases slowed as prices cooled. In the third quarter of 2022, homeowners gained a total of $2.2 trillion in equity than during the same quarter in 2021, an increase of 15.8% and averaging $34,300 per borrower.

What Does Real Estate Housing Recession This Mean for You?

There are several ways to make a real estate recession work in your favor:

  1. Look for properties that are priced below market value due to the recession.
  2. Look for motivated sellers who may be more willing to negotiate during a recession.
  3. Invest in rental properties that can generate cash flow during the recession.
  4. Look for properties in areas that are not as affected by the recession.
  5. Consider flipping properties, as a recession can create opportunities for buying low and selling high.

Opportunity! With housing prices dropping and interest rates still near historical lows, this is the perfect time to find good real estate deals and buy cheap.

Your goal should be to find investment opportunities in markets that offer the greatest long-term growth and stability. These are markets that show growth in employment and population.

Target properties that you intend to hold for a short or long period of time. You will gain equity through appreciation as the markets correct and grow over time.

Be sure to only invest in properties that provide a positive cash flow in order to cover all of your operating expenses. This is very important in order to be able to hold the property long enough to benefit from the appreciation that comes over time with real estate.

On the flip side, this is not the perfect time to sell. If you own real estate, it probably makes the most sense to hold onto your investment until the market rebounds. As always, it will. In the meantime, take advantage of the market by either refinancing your own properties for better terms or buying more property that you can rent with a positive cash flow.

During a real estate recession, property values and sales may decline. However, there are ways to potentially make the most out of a recession. One strategy is to look for discounted properties that can be bought at a lower price and potentially sold for a profit later on. Another strategy is to invest in rental properties, as rental demand may remain steady or even increase during a recession.

Additionally, it is a good time to negotiate a better price with a seller as they may be more willing to accept a lower offer during a recession. It is also important to do your due diligence and thoroughly research any potential investments before making a decision.

Housing Market: Should You Buy a Turnkey Property or Fixer-Upper?

by

The current housing market means you’ll likely pay top dollar for a home that’s considered turnkey — immediately ready for you to move in. Plus, the competition is steep. Perhaps those two reasons are why 52% of American homebuyers are looking for a starter home or a fixer-upper rather than a forever home, according to TD Bank‘s First-Time Homebuyer Pulse, which polled buyers planning to purchase in 2022. If you’re struggling with whether to keep combing the housing market for a move-in-ready home that fits your budget or to take your chances with a fixer-upper, here’s the expert insight you need.

Pros of Buying a Fixer-Upper

Buying a fixer-upper can provide you with advantages that a turnkey home doesn’t offer. Consider the following.

Cheaper Taxes

“Fixer-uppers can be a great way to get a deal on a property and save money on taxes,” said Jeremy Luebke, founder of WeLoveLand. “In many cases, fixer-uppers are sold for less than the market value because the seller is motivated to move the property quickly. This can be a great opportunity for bargain hunters. Additionally, fixer-uppers often come with significant tax breaks. The government offers tax breaks for people who rehabilitate or redevelop properties, so if you’re planning to do major work on your fixer-upper, you may be eligible for some significant tax deductions.”

Flip Potential

“The big advantage to taking the risk on a fixer-upper is the equity you build while improving the value of the property,” said Doug Greene, owner of Signature Properties. “This is the flip potential that exists, while in a turnkey home you are essentially buying the property at full price (i.e., market value).”

Potential for Creativity

“An advantage of purchasing a fixer-upper is the opportunity to put money into the features of your house that are most important to you,” said John Riedl of Easy Cash Offer Florida. “Do you want a modern kitchen? What about a luxurious soaking tub? If you are purchasing a property that is move-in ready, you can find yourself subject to the taste and interests of the past owner.”

Riedl also pointed out that fixer-uppers give you a lot of control over the renovation process by selecting paint colors, floor materials, contractors, and anything else you desire.

Cons of Buying a Fixer-Upper

Time, money and effort are all required when it comes to getting a fixer-upper where you want it to be. Here’s more on the potential disadvantages of going this route.

Renovation Costs

“The cost of labor and materials is near its highest price ever, and if you are hiring contractors to perform work on your home, unless you have a crew on standby, it could be months before the work is done,” said Tony Grech real estate investor and lending expert with Luxury Mortgage. “Just like there is a shortage of home inventory that has driven prices up, there is a shortage of qualified tradespeople as well as a shortage in raw materials due to supply chain issues that stretch back to the beginning of COVID. So you save $20,000 or $30,000 on the price of the home, but it costs you $60,000 to perform the work that you want.”

Effort

Beyond the costs in labor and materials, renovating a home comes with some other headaches and risks,” said Brian Davis, real estate investor and founder at Spark Rental. “You have to navigate the treacherous waters of permits, which involves not just filing fees and dealing with the permit office, but also hassling with inspectors.”

Ryan Fitzgerald, owner of UpHomes also said that renovating a fixer-upper requires a lot of effort. “Renovations are time-consuming and stressful so make sure you’re up for the challenge if you decide to get a fixer-upper,” he cautioned. “If you don’t want to deal with the construction, managing contractors, and living in a home that isn’t finished, a fixer-upper may not be the best choice for you.”

Live Richer Podcast: First-Time Homebuying During Inflation: Is It Worth It?

Pros of Buying a Turnkey Home

While a home that’s ready to move in will likely cost much more than a fixer-upper, there are some definite advantages that are worth considering.

No Renovation Costs

“When you purchase a turnkey home, the price you see is the price you pay,” said Luebke. “There are no additional costs for things like landscape or certain home upgrades. This can be a big advantage when budgeting for your new home. You know exactly how much money you need to bring to the table, and there are no unpleasant surprises down the road.”

Minimal Effort Required

If you’re looking to move in and start enjoying your new home as soon as possible, turnkey home is a perfect choice. “Turnkey homes require much lower effort because you can move right in and start enjoying the home after you unpack,” said Ryan Fitzgerald, owner of UpHomes.

Cons of Buying a Turnkey Home

However, buying a turnkey home also comes with a few drawbacks. It’s up to you to decide if they are worth it.

More Expensive Taxes Upfront

While you can get a lower property tax rate by buying a cheaper fixer-upper, that’s likely not the case with a turnkey home.

“If you opt for a turnkey home, the municipality will have likely already caught up to the new assessed value by the time you move in,” said Greene. “It’s usually the sale of the property that triggers a property reassessment in the system.”

Flip Potential Is Nonexistent

“Buying turnkey is certainly the way to go if you have no desire to make repairs to a home and want it move-in ready,” said Jeff Shipwash, CEO of Shipwash Properties LLC. “Unfortunately, in today’s market, turnkey properties are at a premium. This means you will more than likely have strong competition and will be paying top dollar for it. This results in buying with little to no equity to spare.”

And without any equity to spare, there is no flip potential.

Limited Opportunities for Creativity or Customization

“The home might not be exactly what you want,” said Luebke. “Since the home has already been built, you may be limited in terms of customizations or changes that you can make. The home might come equipped with most, if not all, of the features and amenities that you desire, but there is always the chance that something will not be quite to your liking. This can be frustrating if you have specific ideas about how you want your new home to look and function.”

>>This article originally appeared on GOBankingRates.com.<<

Is the Housing Crisis Over in America?

by

Is the Housing Crisis Over in America?

The housing crisis is not over in the U.S. There is a shortage, or housing underproduction, in all corners of the country. The major coastal cities are known for their exorbitant real estate prices, which are driven by zoning restrictions and a scarcity of available housing. According to a new study, these issues are increasingly plaguing once-affordable towns and cities across the United States.

According to an analysis by the housing policy group Up For Growth, more than half of the nation's metropolitan regions had a housing shortage in 2019, a significant increase from one-third of cities in 2012. The country is short 3.8 million homes to meet its housing needs, which is double the number from 2012.

In recent years, rising raw material costs have exacerbated builders' woes, particularly during the pandemic, when lumber prices increased by more than 150%. But, given the large cohort of Millennials entering the housing market, one of the most significant reasons for this shortfall has been the severe underbuilding of entry-level homes, where the majority of the demand exists. Given the significance of this factor, we go into more detail about the entry-level labor shortage below.

According to an analysis published by Freddie Mac, long-term single-family home development declines have caused the housing shortage. Starter homes have decreased much further, exacerbating that trend. Between 1976 and 1979, 418,000 entry-level single-family homes were built annually, accounting for 34% of all new homes built. Mortgage rates rose from 8.9% to 12.7% in the 1980s.

As mortgage rates rose, housing became less affordable, decreasing demand and supply. In the 1980s, the entry-level housing supply dropped by nearly 100,000 units to 314,000 per year. The entry-level percentage of new single-family homes remained at 33%, similar to the late 1970s, showing that entry-level supply fell by the same amount as the entire new construction market.

According to another report published on the housing shortage by Fannie Mae, every city in the country has a housing supply problem, but each city's housing supply problem is quite unique. The research conducted by the firm found out that while the US has a nationwide affordable housing deficit, each state and city's approach to solving it is different, and the tools and techniques utilized to build needed new housing supply must be adjusted.

Tools to increase housing supply are accessible, although less so. Many towns oppose hard choices and reforms to increase housing for low- and moderate-income homeowners and renters. However, without those choices, the economic and social benefits of adequate housing supply will be wasted and the issues caused by its scarcity will deepen.

The housing supply shortage has well-known causes. After the Great Recession, housing development plummeted. The last decade saw the fewest new residences created since the 1960s. 3.8 million housing units were needed in 2019. The pandemic-induced materials and labor scarcity worsened the tendency, as shown by the 2021 rent and home price increases.

Rising mortgage interest rates have already dampened housing demand, particularly for new homes, and an economic recession could reduce demand further. Prices and rentals may stabilize or fall in some markets. The supply crisis will persist, hurting low- and moderate-income families. Fannie Mae ensures affordable housing for low- and moderate-income families by providing mortgage funding.

From 2019 through 2021, Fannie Mae sponsored almost 575,000 affordable units, according to their analysis. Their loans on newly built single-family houses bought by moderate-to-low-income households, funding to preserve affordable multifamily rental housing, and investments in low-income housing tax credits make up the majority of that amount.

If the housing supply is there, we can finance more. Nope. Families everywhere will continue to suffer with high housing costs until communities take concrete action to construct and preserve affordable housing stock where and how it is needed most. Fannie Mae economists Kim Betancourt, Stephen Gardner, and Mark Palim have issued a study report.

The authors compared the housing supply of the 75 largest U.S. urban markets to the housing needs of their residents. The housing supply problem is national, but solving it is local. Most housing-cost-burdened households are not just in coastal metros with high housing expenses. Fresno, Charlotte, and Las Vegas have high housing-cost-burdened household rates. Even smaller cities like El Paso and McAllen, TX, lack affordable housing.

Housing shortages necessitate localized solutions. According to the research paper, affordable multifamily rental units in Dallas and Atlanta could boost housing affordability. Some markets need new single-family houses, while others need to preserve multifamily housing. This analysis, based on 2019 data (the last pre-pandemic year with accessible housing cost burden data), shows that supply and affordability issues have worsened.

Even if home price growth has slowed and inflation and rising interest rates have reduced demand, working people have suffered from the rise in rents and housing prices since 2019. The supply dilemma can only be solved by building more housing and preserving affordable housing. While the economic drivers of housing costs—materials and labor inflation, supply chain disruptions, etc.—may take years to fix, states and municipalities may work with investors, builders, and lenders to make more homes available.

In several of the most cost-burdened states, zoning reform to encourage higher density and multifamily housing near transit and job hubs are working. Another option is to reduce or streamline regulatory barriers that hinder new development, particularly for manufactured houses and smaller starter homes that have all but gone in many large metro areas and made it hard for millions to buy their first home.

Federal low-income housing tax credits have been one of the most successful capital-generating mechanisms for affordable housing production and maintenance for over three decades and should be expanded and reinforced. Helping first-time homeowners and low-income renters could encourage the construction of additional affordable housing in areas of high demand.

Fannie Mae and the thousands of mortgage lenders and investors they work with daily are ready to finance affordable homes. The US has a world-class housing finance system. It's time to equal the housing supply.

Will the Housing Crisis Worsen in 2023?

Many homeowners are still haunted by the 2008 housing market crash when property values plummeted and foreclosures increased dramatically. According to a new LendingTree survey, 41% of Americans now fear a housing crash in the next year, owing to the memory of a sudden disaster at a time when the real estate market was riding high. But NAR Chief Economist Lawrence Yun draws the distinctions between today’s real estate market and that of more than a decade ago.

“It’s a valid question,” Lawrence Yun, chief economist for the National Association of REALTORS®, said Tuesday at NAR’s Real Estate Forecast Summit. “People are remembering the crushing and painful foreclosure crisis. So, it has become a key question: Will home prices crash after the strong run-up in prices across the country over recent years?”

  1. The labor market remains strong.

  2. Less risky loans.

  3. Underbuilding and inventory shortages.

  4. Delinquency lows.

  5. Ultra-low foreclosure rates.

At the virtual conference, where leading housing economists offered their 2023 forecast for the real estate market, Yun offered assurance that current dynamics are nothing like during the Great Recession. He pointed to several key indicators of how this market differs.

Homes in foreclosure reached a rate of 4.6% during the last housing crash as homeowners who saw their property values plunge walked away from their loans. Today, the percentage of homes in foreclosure is 0.6%—also at historical lows, Yun said. He predicted foreclosures to remain at historical lows in 2023.

housing crisis or crash coming
Source: REALTOR® Magazine

Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis at the National Association of Home Builders, said she expects housing starts to drop by double digits in 2023. Then, “as the economy improves in 2024, the housing market will gradually come out of this slump that is expected from the next year,” she added.

Builder confidence has fallen over the last 11 months as mortgage rates rose and buyer traffic slowed dramatically. Fifty-nine percent of builders have reported using incentives, like mortgage rate buydowns and price cuts, to try to win buyers back, Nanayakkara-Skillington said. Labor shortages combined with lot shortages, higher material costs, and lending issues for builders are all compounding factors preventing more construction.

And while lumber prices have eased from record highs, construction costs remain 14% higher due to shortages in other supplies, like gypsum and steel. “All of these issues will keep homebuilding down,” Nanayakkara-Skillington said. “We don’t see these issues being resolved in the near future either.”

Sources:

  • https://www.freddiemac.com/research/insight/20210507-housing-supply
  • https://www.cbsnews.com/news/real-estate-housing-shortage-crisis/
  • https://www.fanniemae.com/research-and-insights/perspectives/us-housing-shortage
  • https://www.nar.realtor/magazine/real-estate-news/2023-real-estate-forecast-market-to-regain-normalcy

What is Cash on Cash Return in Real Estate?

by

Cash on Cash Return

Cash on cash return (CoC) is a measure of the cash flow from a real estate investment, expressed as a percentage of the initial cash investment. It is used to evaluate the profitability of a rental property or other real estate investment. A high cash-on-cash return indicates that the investment is generating a good return on the initial cash investment.

Low cash on cash return indicates that the investment is not generating as much cash flow as expected. The cash-on-cash return of an investment property is a measurement of its cash flow divided by the amount of capital you initially invested. This is usually calculated on the before-tax cash flow and is typically expressed as a percentage.

Cash-on-cash returns are most accurate when calculated on the first year's expected cash flow. It becomes less accurate and less useful when used in future years because this calculation does not take into account the time value of money (the principle that your money today will be worth less in the future). Therefore, the cash-on-cash return is not a powerful measurement, but it makes for an easy and popular “quick check” on a property to compare it against other investments.

For example, a property might give you a 7% cash return in the first year versus a 2.5% return on a bank CD. It's worth noting that cash on cash return is a short-term metric, it doesn't take into account the long-term appreciation of the property, and it doesn't include tax benefits. Therefore, it should be used in conjunction with other metrics, such as the cap rate, to evaluate the overall performance of a real estate investment.

The cash-on-cash return is calculated by dividing the annual cash flow by your cash invested:

       Annual Cash Flow / Cash Invested  =  Cash-on-Cash Return

The annual cash flow is the net income from the property, which is calculated by subtracting the annual operating expenses (such as mortgage payments, property taxes, insurance, and maintenance) from the annual rental income. The initial cash investment is the total amount of cash invested in the property, including the down payment, closing costs, and any other expenses.

Let's make sure we understand the two parts of this equation:

  1. The first-year cash flow (or annual cash flow) is the amount of money we expect the property to generate during its first year of operation. Again, this is usually cash flow before tax.

  2. The initial investment (or cash invested) is generally the down payment. However, some investors include their closing costs such as loan points, escrow and title fees, appraisal, and inspection costs.  The sum of which is also referred to as the cost of acquisition.

Let's look at an example. Let's say that your property's annual cash flow (before tax) is $3,000. And let's say that you made a 20% down payment equal to $30,000 to purchase the property. In this example, your cash-on-cash return would be 10%.

     $3,000 / $30,000  =  10%

Although the cash-on-cash return is quick and easy to calculate, it's not the best way to measure the performance and quality of a real estate investment. Future articles will introduce you to better ways to evaluate your real estate investments.

What is a Good Cash Cash Return in Real Estate?

There are no hard and fast rules for determining a specific figure that should be considered a good cash-on-cash return. Most investors, however, agree that a projected cash-on-cash return of 8% or higher is the ideal figure. It also relies on the investor, the local market, and your future value appreciation forecasts. Some real estate investors are happy with a safe and predictable CoC return of 7% – 10%, while others will only consider a property with a cash-on-cash return of at least 15%.

Cash on Cash Return Vs ROI

Cash on cash return (CoC) and return on investment (ROI) are both measures of the profitability of a real estate investment, but they are calculated differently and provide different information. Cash on cash return is a measure of the cash flow from a real estate investment, expressed as a percentage of the initial cash investment. It is used to evaluate the profitability of a rental property or other real estate investment.

Return on investment (ROI) is a measure of the overall profitability of an investment, expressed as a percentage of the total investment. It takes into account both the cash flow and the appreciation of the investment.

The formula for ROI is: (Net profit / Total investment) x 100

The net profit is the total return on the investment, which includes the cash flow, any appreciation, and any other income from the investment. The total investment is the initial cash investment plus any additional costs, such as closing costs, repairs, and improvements.

For example, if an investor purchases a property for $200,000 with a $40,000 down payment, the property generates $12,000 in annual cash flow and the investor sells the property for $220,000, the ROI would be: ($12,000 + $20,000 / $40,000) x 100 = 80%

Cash on cash return provides information on the short-term cash flow of the investment, while ROI provides information on the overall profitability of the investment, including both cash flow and appreciation. It's important to use both metrics to get a full picture of the investment's performance.

Cash on Cash Return Vs Cap Rate

Cash on cash return is a measure of the annual cash flow of a rental property as a percentage of the initial cash investment. The capitalization rate, or cap rate, is a measure of the rate of return on a real estate investment property based on the income that the property is expected to generate. While both measures are used to evaluate the performance of real estate investments, they are calculated differently and provide different information about the potential returns of a property.

Although there are many variations, the cap rate is generally calculated as the ratio between the annual rental income produced by a real estate asset to its current market value. Cap rates are measures used to estimate and compare the rates of return on multiple commercial or residential real estate properties. In contrast to the cap rate formula, which should only be used to compare similar properties in the same market, the cash-on-cash return formula can be used to compare potential cash returns across real estate markets.

To calculate the cap rate for a rental property, you will need to know the property's net operating income (NOI) and its purchase price or current market value. The formula for calculating the cap rate is:

Cap Rate = NOI / Purchase Price (or Market Value)

For example, let's say you are considering buying a rental property for $300,000 and the projected net operating income (NOI) is $30,000. To calculate the cap rate, you would divide the NOI by the purchase price:

Cap Rate = $30,000 / $300,000 = 0.1 or 10%

So in this example, the cap rate for the property is 10%. This means that the property's projected net operating income is 10% of its purchase price. A higher cap rate indicates a higher rate of return, so in this case, you would likely see the rental property as a good investment opportunity.

Risks of Real Estate Investing: What You Can Do About Them?

by

Risks of Real Estate Investing

Risks of Real Estate Investing

Everyone would be a millionaire if real estate investing were 100% risk-free. No one would have any reason not to invest. Real estate investing, like any other form of investing, comes with risks. Only those investors who are willing to take on these risks and have the knowledge and skills to manage them will be successful in the long term.

Real estate investing requires a significant amount of knowledge and understanding of the market, the property, and the financing options available. Investors who are not well-informed about these factors may not be able to effectively manage the risks associated with their investments.

For example, an investor who is not familiar with the local market may not be able to accurately predict changes in demand and property values, which can lead to a loss. Similarly, an investor who is not familiar with the property they are investing in may not be aware of property-specific risks such as structural problems or zoning changes, which can also lead to a loss.

In addition to knowledge, investors must also have the skills necessary to manage risks. For example, an investor who is not able to effectively manage tenants may have difficulty collecting rent or may have to deal with costly repairs and maintenance. Furthermore, an investor who is not able to effectively negotiate financing terms may end up with a mortgage or loan that is not favorable, which can lead to additional risks.

Here Are Some Real Estate Investing Risks and How to Manage Them

Market Risk:  Market risk in real estate refers to the potential for the value of a property to decrease due to changes in economic conditions and supply and demand. Economic factors such as recession, inflation, and unemployment rates can all affect the demand for housing and, as a result, the value of properties.

During a recession, for example, unemployment rates may increase, and people may have less disposable income, which can lead to a decrease in demand for housing. As a result, property values may decrease, leading to a loss for the investor. Similarly, if there is an oversupply of housing in a particular area, it can lead to an excess of properties on the market, which can also lead to a decrease in property values.

It's important to note that market risk can be mitigated by investing in a diversified portfolio of properties, which can spread the risk across different types of properties, locations, and economic conditions. As well as, doing proper research and due diligence to identify properties that are likely to hold their value or appreciate in value, and investing in areas that are likely to be in demand in the future.

Rental Risk: Rental risk in real estate refers to the potential for a loss of income from rental properties due to a variety of factors. One of the main risks is that the property may not be occupied, meaning that the landlord will not receive any rental income. This can happen for a variety of reasons, such as a lack of demand for rental properties in the area, a lack of suitable tenants, or difficulty in finding tenants.

Additionally, if the property is only occupied for a short period of time, the landlord may not be able to charge enough rent to cover the costs of the property, leading to a loss. Another risk is that tenants may not pay rent on time or at all. This can lead to a loss of income for the landlord and can also lead to additional expenses, such as legal fees and court costs if the landlord needs to evict the tenant.

Property damage caused by tenants can also lead to a loss of income. Tenants may cause damage to the property through neglect or misuse, which can lead to repairs and maintenance costs for the landlord. Moreover, if the landlord is not able to find suitable tenants, the property may be vacant for a long time, which can lead to additional expenses, such as property taxes and mortgage payments, which will further decrease your income.

To mitigate rental risks, a landlord should screen tenants carefully, using credit checks, employment and landlord references, and background checks. Also, it's important to have a solid lease agreement that clearly outlines the rights and responsibilities of both the landlord and the tenant, as well as the consequences for not following the lease agreement. Additionally, landlords should keep the property well-maintained to attract and retain tenants and should have a plan in place to handle vacancies and non-payment of rent.

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. So you must know how to find and analyze a good real estate investment. If this is a skill you are working on, you can reduce your risk and save some time by using the services of a real estate investment firm.

Availability of Funds: One of the primary barriers to investing in real estate is the lack of funding. Even though you can invest in real estate without using your own money, you still need to have money from somewhere. There are many creative ways of getting other people's money (OPM) to complete a transaction, and many good books have been written on the subject. One of the latest incarnations of OPM has been the use of corporate credit.

Interest rate Risk: Changes in interest rates can affect the affordability of a property, which can affect the demand for that property. This can also affect the value of a property. For example, if interest rates increase, it may make it more difficult for buyers to afford a property, which can lead to a decrease in demand and a decrease in property values.

Property-specific Risk: Issues with a particular property, such as structural problems, zoning changes, or environmental hazards, can all negatively impact the value of the property. For example, if a property is found to have a serious structural problem, it may be difficult to find buyers or renters willing to purchase or occupy the property, which can lead to a decrease in value.

Leverage Risk: Real estate investing often involves borrowing money, which can amplify potential losses. When you borrow money to invest in real estate, you are increasing your risk of losing money. If the value of the property decreases, you may owe more on the property than it is worth, which can result in a loss.

Time Constraints: Some types of investments require more time than others, for example, distressed and rehab properties. Other types of investments require you to be available during business hours. If your regular job demands most of your time, you might find it difficult to make time to invest in real estate. Understand the time involved with the various types of real estate investments so you can plan your schedule around your investing.

Need for an Exit Strategy: Before you go into a deal, you need to have a feasible plan for getting rid of your investment property. Note the word “feasible.” Your exit strategy has to be logical and doable; otherwise, it's not a very good exit strategy. Your plan may be to fix and flip the property right away, or it may be to lease and hold for 10 years.

Be sure to invest with a clear and specific exit strategy in mind. And always have a contingency plan in place in case situations come up that are out of your control. Real estate investing, like any other form of investing, has some potential risks. On the positive side, these risks are associated with the potential for high returns. But with proper planning and ongoing education, you will be successful as a real estate investor.

In summary, real estate investing is a risky business, and only those investors who are willing to take on these risks and have the knowledge and skills to manage them will be successful. It's important for an investor to thoroughly research and understand the market and the property before investing, and to have a solid plan in place for managing risks.

Blog Posts

Contact

Norada Real Estate Investments 30251 Golden Lantern, Suite E-261 Laguna Niguel, CA 92677

(949) 218-6668
(800) 611-3060
BBB