Residential Real Estate: Risk Management
Residential real estate property is considered to be a rather safe investment for the long term investor. The return is determined by the change of value for the property and the direct return through net rental income. When investments in residential property are compared with other types of investments, they have high returns compared to their standard deviation.
There are both advantages and disadvantages by being a small investor in residential real estate property. The main disadvantage is that they are poorly diversified and this makes your income and wealth fluctuates. On the other hand small and huge investors are often competing in different segments which make comparison rather irrelevant. Local real estate market knowledge is also important for reducing risk for investing in residential property.
The overall residential real estate risk management is more or less similar to other investments but, there are some special features for residential property to overcome.
- The investor should able to charge the maximum rent for his property. If this level is low then it leads to market imperfections and the real estate appreciation comes down due to reduced potential income.
- Real estate is not mobile. This makes property items vulnerable to changes in local legislation. Items that cannot be moved are ideals for the government and municipalities to collect income tax on it.
- The occupancy rate is also a significant risk factor. Vacancies and falling rates of real estates leads for the negative impact on property returns and the vacancies lead to reduce costs. Reinvestment is needed for increasing the occupancy rate again.
The main thing that you should consider when it comes to the residential real estate risk management is financing. You need to know in advance, what type of risk you are going to face in future and how much you can afford. You should arrange enough money to support the money going out includes rental income and property expenses.
Even though you are having enough money in a real estate, you should spend some time to manage the property.
There are lots of risks during real estate investment, so it is better to sit and make a plant by considering all the possible angles for reducing the risk.