So far in these posts, we have talked about the advantages of real estate investing. First, we looked at all the reasons why real estate is such an incredible investment choice compared to other options. Second, we looked at the different profit centers of real estate investing. Then we went on to see various styles and a variety of real estate investing techniques. In the last two posts, we discussed the process of deal-making, the roles and responsibilities of the real estate entrepreneur and the money partner, as well as various professionals who make up our power team and can help with the property purchase, financing, and maintenance. As with any investment, it is important that you go into this venture with your eyes wide open.

In this post, we are going to look at several of the most common risks associated with real estate investing and some of the possible solutions to those challenges.

Risk #1: The Real Estate Market Could Crash

This is probably the biggest fear many novice investors have about real estate, especially since the memory of the 2008 housing meltdown in the United States is still fresh in our minds. This is an understandable concern, considering that in several regions of the US, property prices dropped by as much as 50 percent in 12 to 24 months. The reality is that the real estate crisis affected only five main markets. The rest of the country was largely unaffected with regards to falling property prices. They didn‘t see the kind of appreciation they had prior to the crisis, but these markets did not crash, either. An important thing to remember is that real estate follows a predictable cycle of rising prices, plateau, and decline, which then repeats. History and experience shows that the only time you should really be concerned about housing market adjustments or crashes is if you are in a very short-term investment strategy.

But if you take a long-term approach to real estate investing and you focus on more than just appreciation as a profit center, then these normal market ups and downs will not have as much impact on you. The bottom line is this: If the market you are investing in declines but you hold the property for several years, the values will come up to where they were before—and then the prices will continue to increase. So the fear of the housing market crash is a justified concern only if you are in a short-term strategy.

Risk #2: The Rental Market Could Go Down

This is a consideration if the local area you are investing in experiences some sort of dramatic economic change and many people leave the area. Or it could be a concern if you are in an area that gets overbuilt with rental units. Although the rental market could go down, it is—just like property values we mentioned above—a cyclical phenomenon. In the short term, the rent may have to be lowered in order to keep the vacancy rate low. But in the long term, you should be able to get on track again within a couple of years. There are several different ways to mitigate this risk. If you focus on single-family homes, you could consider adding a basement suite, as well as possibly renting out the garage separately. This would turn a single-family home rental into two or even three different revenue streams (thereby increasing your cash flow and decreasing your risk exposure if one unit is vacant). With multi-family properties, you could consider adding incentives such as free utilities, flat-screen TVs, and lower rent when tenants sign on for a minimum one-year lease.

As far as determining if your local market is likely to face a high vacancy rate or not, a good power team, along with doing your own due diligence, should show you the longterm economic outlook of the market you are shopping in.

Risk #3: There Could Be Unforeseen Issues with the Property

Many new investors are afraid they may unwittingly buy a property that has hidden defects. This is why it‘s important to work with the proper professionals as part of your real estate power team. A qualified and experienced property inspector will spot any problem areas, so you will know exactly what you are getting and how to deal with any defects that are found. One smart way to minimize your risk is to negotiate the price of the property so that there is instant equity that will also help cover any of the repair costs.

The better the deal you negotiate up front, the less risk you have of unforeseen problems. And an astute real estate entrepreneur will always have a contingency fund put aside where a portion of the income from the property is allotted specifically to deal with any issues like this.

Risk #4: Tenants Might Damage the Property

We have all heard horror stories about tenants from hell. As with most bad news, this tends to be the exception rather than the rule, but it‘s better to be prepared just in case. Astute real estate entrepreneurs will handle this risk in several ways.

First of all, they will be rigorous in screening potential tenants, checking references, running credit and background checks, etc. There is usually a damage deposit collected from the tenant prior to them moving into the property, which, in conjunction with a reserve fund, should cover any normal damage a tenant may cause. And if the damage incurred is substantial, it should be covered by the property insurance. If things are done properly in the first place, this particular concern should not cause you to lose any sleep. This is particularly true if you are the money partner in the deal and you are working with an experienced, astute real estate entrepreneur.

Risk #5: Something Catastrophic Might Happen to the Property

While no one can predict the future with any certainty, chances are you will go through your entire life without having any kind of fire, flood, earthquake, tornado, or other major disaster hit any of your rental properties. That said, if something unpredictable does happen, that‘s what property insurance is for: to cover unexpected events. When you are properly insured, you will not only have your damages taken care of, but will also receive compensation for loss of rental income.



Risk #6: Things Might Not Work Out between the Real Estate Entrepreneur & the Money Partners

There is no guarantee that the relationship between the real estate entrepreneur and the investor will always go smoothly. That‘s why it is so important that you know, like, and trust the person with whom you are working. That said, if there is some sort of an issue, there should be an escape mechanism in the contract, allowing you to exit the deal without ruinous financial consequences. Make sure to get proper independent legal advice and have a good contingency plan before entering into any partnerships.

Summary: So there you have it: six of the biggest risks and concerns people have about real estate investing, as well as tips on how to protect yourself. If the property or rental market goes down, unforeseen issues with the property crop up, tenants damage the house, a disaster strikes, or you have problems with your money partners, there are always solutions to either prevent or mitigate your losses. If anything in this chapter is unclear or you would like more information, please contact the author. Their contact information is on the back cover of this book. Speaking of questions and clarity, in the next post, we will go through the most frequently asked questions people have about investing in real estate—especially as a money partner.