Understanding the pitfalls of real estate investing is critical to building your real estate portfolio and longevity whether you are investing in residential or commercial real estate.
One of the best ways to protect yourself is to be proactive and educate yourself as to where the risks may lie and what you can do to either avoid said risk or at least minimize it. Being proactive will help you save a lot of headaches, heartburn, and money.
To some degree, real estate risk is inevitable no matter what asset class you invest in. Some risk can be completely avoided, while other risk can be reduced by transferring the risk or controlling it on an ongoing basis.
Defining a potential risk and having the ability to avoid it is one of the best ways to eliminate it. For example, if you want to avoid a non-paying tenant, then make sure you do a thorough background check and/or consider a subsidized tenant.
Not every risk can be avoided, which is why risk control is the most common mitigation strategy. Maintaining a property before problems occur such as maintenance on an HVAC system makes that tenant more likely to want to stay and pay rent.
Transferring certain risks is another way to protect yourself and many times is used in addition to other mitigation strategies. An example is having a home warranty whereby the tenant calls the home warranty company, and the repair cost is covered with a service call fee and transfers the risk from you as the property owner to the home warranty company. (Different warranty policies cover different items, so be sure to read the coverage.)
Now that you know in what ways you can mitigate risk, it’s important to understand the different types and causes of risks you might encounter.