When it comes to long term investments, real estate is deemed to be the most safe and durable investment out there. Basically it’s a classic mentality deeply indoctrinated in our society especially among the older generations that a real estate investment is your one way ticket towards a 100% secure future. Now we won’t say that expecting somewhat financial security after investing your money in a constructive cause is erroneous on your part, but there are many do’s and don’ts, several risk factors involved which if not catered properly could even turn your best investment into a huge nightmare.
Below we have compiled a list of all the risks that one must consider and not overlook during the process of procuring property.
Risk 1: Mortgage Payment Plans
As we all know that real estate is among the most expensive investments. It is not financially convenient for most people to invest in such a humongous amount except for people belonging to higher socio-economic class. This factor had been reducing the target market of the real estate for a long time until the concept of mortgage was coined so that not only more people are facilitated into investing in real estate but also the target investor market of the real estate increases as to benefit the sector overall.
Mortgage or a lease works such that a certain amount of capital is acquired as a ‘down payment’ first. The rest of the payment is paid monthly, bimonthly or quarterly (depending upon the payment plan) in the form of installments. There are various successful and accommodating projects in the Pakistan’s real estate right now that work on the same principle such as Lahore Smart City, Capital Smart City, Parkview City, Royal Orchard Multan etc.
Risk 2: Exploitation & Damage Caused by Tenants
Perhaps the most overlooked risk in this scenario is the risk of bad tenants. While there are many risks which the most careful and experienced people tend to study and eradicate, this is a factor almost always ignored by everyone. A very major sector of real estate incomes is comprised of rental properties. Many people purchase properties solely to rent them out later to create an extra source of income for themselves.
Now the cash flows for the rental property are mostly expected to be raised with the passage of time, unless the property is not maintained every now and then. Tenants tend to damage several parts of the property they use and often leave without a trace. Non cooperative tenants could be a nightmare for the investors. The losses that are deemed as insignificant could be a huge financial setback for the investors lending out the property. To mitigate this risk, the investors must always research about the tenants as much as how usually the tenants research about their property before handing a down payment. Even if it goes as far as checking our criminal records and asking for the copy of their CNIC number so in case any theft is made or an extreme mishap is caused the investors may take legal action on time and protect their property.
Risk 3: Slow Construction Process
Since most of the people in our country tend to invest in either mortgages or in projects that are still under process of construction they tend to get themselves into a huge risk. Now the people who have invested in a project that isn’t completed or hasn’t finished according to the promised timeline are exposed to a financial vulnerability as they might have to continue paying the lease or rent. This is perhaps the biggest risk involved in the real estate sector.
Risk 4: Liquidity
Among all the type of long term investments including the real estate, a major halting factor faced by them is the illiquidity of assets. Real estate happens to be the most affected by this risk factor. It requires a huge amount of investment, so if you do not want to further deal with real estate it’s not convenient to work it out or easily converts your assets into something liable and profitable later. It takes a lot of time, dedication and a very impeccable strategy.
Now contrary to the popular belief of the real estate prices always spiking with years, just like stocks or any other investment market, there is a continuous fluctuation in the real estate pricing throughout. Sometimes a major downfall in the market could create a serious financial risk for the investors.
Risk 5: Misinformation and Bias by the Counterparty
The real estate market is acutely impenetrable when it comes to extracting accurate information regarding the property in the markets. Unlike other high investing markets it does not have well acquainted and supported data to acquire completely transparent and authentic information. Since there is no specific source of 100% rigorous and factual data there is a slight chance of misinformation resulting in inapt decision making during the process of procuring in the real estate market.
Eager real estate buyers tend to rely on brokers or realtors. There is always a chance of dishonesty from the third party involvement due to their own vested interests. Therefore, to mitigate this risk it is essential to not rely on information coming from only one source. In fact a detailed and thorough research through various trusted sources and strong analysis might eradicate this risk to the maximum extent.
However despite all the effort, there might still be a slight chance of misinformation which might result in a mishap.
Real estate investments would always be a risky investment, there are many factors involved that require research and proper analysis. This is not an investment that even if made in haste would not end up in loss.
So, as said above as the right real estate investment could be your gateway to financial security and stability it could also lead to a much drastic condition if these risks are not analysed and mitigated timely.