Active risk management is essential for building a strong investment portfolio. Even though real estate is stable and less volatile unlike the other investment options, there are some inherent risks to be considered, prepared and mitigated, irrespective of it being commercial or residential real estate property. Being proactive and educating yourself of the various risks involved in a real estate transaction can help you save money and time in the long run. To help you stand ahead of the curve, listed below are some of the common risks in real estate transactions and tips to mitigate them before they become too risky.
Risk Management and its objectives
Risk management is a method of determining the various risks associated with an investment and then finding ways and methods to cope up with them. It is a very important course as any large and small issues can take a toll on your investment economically. Risk management helps in mitigating the risk based on the financial objectives of the investor.
The three main objectives of the risk management plan are to avoid, control and transfer risk. Risk avoidance simply means ignoring those activities that are too risky and risk control entails the process of having an efficient plan to minimize the potential risk of investing. The process of transferring risk can be explained as the process of shifting the risk to a third party, for example, insurance.
A good property manager will always have a plan to solve any issues in the property in the most efficient manner, keep all the files and records updated and keep a check on the different functions that are carried out on the property to ensure if any changes, repair or maintenance work is necessary.
Importance of risk management
The risk management process is very important as it helps property managers to identify all potential risks and find necessary solutions. One of the major processes in risk management is the identification of all potential risks associated with the property. The type of risk that you incur varies based on the type of property you invest in and also the methods you employ in investing. Once all the potential risks are identified, it is easy to find solutions and mitigate them. Risk management can also help you identify all potential defects in the property and eliminating them one by one to gain better returns once it is sold.
Assessing your property and then managing them are some of the best ways to manage risk and any eventualities that may result in risk. After you identify all the potential risks, you are required to assess them based on the loss you may incur on their happening and the need for immediate solutions. By identifying and assessing your risk, you will be able to plan your finance better and ensure cash flow.
Risks to look out for Investors
The growth of the portfolio can also indicate more risk. It is very important that the investors undertake some important research and data analysis to identify all the risk. Mere identification is not enough, you are required to assess these risks and help suggest ways to mitigate the risk. Some of the common risk faced by the investors are listed below:
Physical property risks
The most important task for the property owners is to assess the state and condition of their property. Irrespective of the number or the size of the properties you are managing it is very important to check the condition of the property as physical property damage is a constant risk.
While selling or renting your property there are chances of you incurring physical manages on your property such as furnisher damages, paint that has dimmed, the exterior of your property which may have deteriorated as a result of weather conditions, etc. repair works should be carried out regularly to ensure that they are kept intact for the next tenant or the buyer. If your property is located in areas that are prone to earthquakes, heavy rainfall, flood, or storm, then you must take necessary measures to eliminate such risk as well.
The tenant can be the next major source of risk for real estate investors, owners, and managers. Various risks involve tenants. Renting is one of the best ways to ensure a steady cash flow from your real estate investments.
Imagine a circumstance in which you have purchased a property acquiring loan from the bank and then you rent out the property. The obvious expectation of the investor while making such investments is to increase his monthly earnings and also to furnish the EMI on his loan. If the tenant does not pay his monthly rent on a regular basis, the investor stands a risk. Such risks can be mitigated by conducting a proper screening of your tenants before agreeing.
Inability to find tenants is also another risk while investing in rental real estate properties. It is hard to find tenants for commercial and industrial properties in comparison to residential properties and you stand a risk if you fail to find tenants for your property. However, the tenants for commercial and industrial properties generally enter into long term contracts. Normally the lease period for industrial properties is last for 20-30 years or in some cases even longer.
There are several risks associated with the construction process. While carrying out construction activities you can face both economic as well as market risk. The economic or financial risk arises with the changing times. The change in the inflation rates has the power to increase or decrease the price of the raw materials required for carrying out construction activities. Climatic conditions such as rain, storm, etc. can cause a delay in the construction works and thus causing risk.
For under-construction properties, labourers play a very vital role and any injury caused by labourers or absence of enough labourers can bring in risk for the developers as the construction processes can be delayed. The pandemic and the reverse migration of the construction labourers is a good example of risks associated with the construction. The property also stands a risk in case the construction works are not carried out following the approved plan. The risk of reverse migration is being mitigated with the help of vaccinations. Developers are taking keen steps to ensure vaccination for labourers between the age group of 20-45 years according to the recent reports.
Risk management strategies
Identifying and understanding risk very important as they help you with strategies for such situations. For deciding on the necessary strategy to be employed it is important you analyze various risks and determine the quantum of each of these risks. Some of the common strategies to avoid risk includes:
- Diversifying your portfolio and invest in different investment options to eliminate or reduce market risk
- You can invest through blockchain technology and fractional ownership to reduce liquidity risk associated with real estate transactions
- Get your property insured to protect it against any unforeseeable damages such as earthquake, flood, fire, storm, etc.
- Periodical inspections carried out on the property can also help you avoid and control any physical damages on the property.
- By conducting proper research and proper due diligence can also help eliminate any legal risks such as unclear title, tenant injuries, defective construction, etc.
- You can also eliminate construction-related risk by investing with the renowned builder, obtaining professional help and getting your construction plans checked, appointing property management companies, etc.
Risk is a fundamental factor of any investment and needs to mitigate at every stage to secure your investments. Real estate is undoubtedly a good investment. However, some factors may prove risky and are capable of causing you financial loss. Risk can arise from economical, financial, political, climatic factors. They can also arise from market conditions and even from unforeseeable situations. You can efficiently strategize your risk management process personally or with the help of property managers. Assetmonk is a smart investment platform that offers properties in Bangalore, Hyderabad, and Chennai. The curation process is carried out after conducting thorough due diligence to ensure the best investment opportunities for the investors. Visit us for stress-free investment opportunities!
Real Estate Risk Management: Tips to Safeguard Your Investment FAQ's:
Risk management in property management implies the process of identifying, accessing, avoiding, controlling, or transferring any potential risk on your real estate investment. The property managers are expected to bring about efficient strategies to mitigate the risk. By getting insurance you can transfer your risk as well.
The strategy to mitigate real estate risk depends on each situation. For example, you can invest through the fractional ownership method to eliminate liquidity issues and you can carry out a regular inspection on your property to identify any potential physical damage on the property. Ensuring your property is also an efficient strategy to eliminate unforeseeable risk.
Some of the common risks in real estate investments include risk of physical damage, risk of vacancy, risk of unforeseeable happenings, etc. These unforeseeable situations include the pandemic, new laws, change in climatic conditions, etc.
The fact that real estate is tangible makes it one of the safest options to invest in. Investing in real estate also gives you a hedge against inflation and it also appreciates over time. Real estate acts as financial security and you can mortgage them whenever you need to raise a large amount. Investing in real estate also brings in tax benefits. Thus it is one of the safest options to invest in.