The risk of investing in real estate in a down market. Is it real or imagined?
Many people sit on the sidelines when real estate is down, instead of buying up at the bottom. The main reason…Fear.
Real estate does have its risks, but then again, so do all businesses. Risk is relative, mostly relative to potential reward. For example, if you keep your investments in cash, money markets, and CDs, you are pretty much free from risk. You are also free from earning any money, since inflation will rise faster than your investments. Being safe in this case can actually mean a signicicantl risk of loss, more than if you buy something like a tax lien certificate or higher yielding bonds.
Real estate is in a different risk category than cash and CDs, simply because you can lose more than your investment – you can be liable on a loan, you could get sued by tenants, you could have negative cash flow. However, these risks can be managed to an acceptable level, and your return will be commensurately higher.
You could take it to the highest level of risk and reward and bet on the dog races, but for most people, this level of risk is not acceptable. So, most people end up in the middle, investing in real estate, the stock market, and other medium-risk investments.
The good news about real estate is that risk is directly correlated with education, that is, the more you know, the less risky it becomes. The more you understand the techniques, the market, and the financing, the less chance you have of losing money. Compare this to the stock market, where risk and education have very little correlation in that even the best fund managers have a difficult time consistently making profits in a turbulent market. True, real estate means more work and has a higher learning curve, the in the long run, the education will pay off.
In conclusion, real estate risk can be managed by learning the ropes and researching your market. Become a master of your field of real estate endeavors, and your rewards will become greater as you become more experienced.
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Attorney William ("Bill") Bronchick, the host of Legalwiz.com, has authored six best-selling books and is sought nationwide for his 30+ years of real estate and legal knowledge. He has been interviewed by numerous media outlets, such as CNBC, TIME Magazine, USA Today, Investor Business Daily, Forbes, and the LA Times, to name a few. William Bronchick is the co-founder and past President of the Colorado Association of Real Estate Investors and the President of the Colorado Landlords Association. Click on the "About" link above for more information on William Bronchick.