To grow wealth, individuals have lately started investing in various assets. One such famous investment avenue is a residential real estate property.
Here we list 7 significant risks that one must take into account when buying a real estate property as an investment:
Risk 1: Illiquidity Risk
Illiquidity risk refers to the risk of not being able to sell the asset close to its market price within a short time. Buying a real estate property makes you asset rich but cash poor.
Buyers are willing to buy at a lower price, whereas sellers are not ready to sell the property at the buyer’s price. Hence, being unable to monetise your asset within a specified time is a massive risk concerning real estate investments.
Risk 2: Regional Nature of Real Estate
The regional or local nature of the real estate market also needs to be considered. Housing prices in Mumbai may rise at a faster pace, say, in comparison with prices in Kolkata. This creates a pricing discrepancy. In contrast, the prices of other commodities like gold remain almost the same at most locations.
Another issue that the regional nature of the real estate market creates is that when an individual wants to sell his/her property, it becomes difficult to estimate the actual intrinsic value of the property.
Risk 3: Needs Huge Investment Amount
Making a direct investment in a real estate property such as a house requires a huge cash outlay, which leads to the concentration of assets in a single asset, i.e., real estate. This might not be a good choice from an asset allocation perspective, as stocks and mutual funds will become only a tiny portion of your total wealth.
Risk 4: Modest Returns
Based on the historical data, purchasing residential properties from an investment perspective gives modest returns in rental yields between 1 and 3%. In contrast, capital appreciation is limited to the general inflation levels.
Thus, a residential real estate investment might not be a good proposition for individuals who want to grow their wealth faster.
Risk 5: Risk of Choosing a Bad Location
Another risk that a residential real estate investment carries with itself is the risk of choosing the wrong location.
Consider this situation; you purchase a residential flat in a high-rise building near the airport. A couple of years later, your building committee received a letter from the local corporation that the upper two floors of the building needed to be demolished because of the aeroplanes passing from such a narrow range. The prices of your locality will suddenly drop.
Risk 6: Too Much Maintenance Required
A house also becomes a bad investment if too many expenses are incurred frequently in maintenance or repair works.
Risk 7: Vacancy Rates
Higher vacancy rates will lead to a loss of rental income as the property will be lying vacant. Situations like these can arise during an economic downturn when the ability to pay rent decreases.
Also, during an economic downturn, you cannot liquidate your assets quickly!
These were some of the risks associated with buying residential real estate as an investment!
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
