5 Tips to Help Reduce Risk in Real Estate Investments
While real estate investments are comparatively stable, there are ways how you can reduce the risk involved in them.
The real estate market across the world saw quite a stunted growth during the 2019-2021 phase of the COVID pandemic. Primarily because people wanted to play it safe fearing a shift in the demand and supply when the world finally adjusted to the new threat. However, even during those times, the Indian real estate market remained rather stable. Commercial real estate was among the few sectors that showed great recovery as the years passed. Good market conditions, bullish economic sentiments, and low interest rates are causing the market to move in a positive direction even more. Read on to find 5 ways in which you can effectively reduce risks in real estate investments.
Just like the pandemic, market risks, economic risks, and developer-related risks exist in the real estate investment sector. While they are few and far between, it makes sense to reduce the risks involved in your investment as much as possible. Risk management is not a very tedious task once you get to understand the basics for the kind of investment you are dealing with. In case of real estate, bear the following in mind -
Market Analysis - This is probably the thumb rule for any kind of investment that you might be planning. Knowing about the demand-supply dynamics, historical sentiments of the market and the market trends helps in understanding how appreciation works and if a location is beneficial for the period of investment you have in mind. In addition to that, knowing about the physical condition of the asset, the upcoming buildings in the area, businesses/IT parks, and the social infrastructure can reveal a lot of valuable insights to the investors.
Diversification of Asset - As with any kind of investment, with real estate as well, it is a really smart choice to opt for diversification. Real estate can include residential, commercial, and mixed use assets. Diversifying your investments across different asset types helps one optimize returns on the portfolio and avoid any kind of possible negative trend in any particular category.
Diversification in Geography - While with most traditional investment options, one is limited to diversification only across the asset types, in real estate, you can and ideally should diversify your portfolio across locations as well. Trends can vary from micro market to micro market, and vary from the overall average trend shown in a state or city to a great degree. So, it is ideal to know which markets can be good for you in the long run and choose those locations for future investment purposes.
Understanding Your Investment Period - Real estate is an immovable asset with limited liquidity options, unlike mutual funds, bonds, or stocks. When you decide to invest in real estate, know that your major benefit lies in value appreciation, because that is when your investment actually grows significantly. That is why, it is always advised to invest in real estate for the long term, preferably for 5 years or more. With capital appreciation at play, since your initial investment is amplified, the downsides of cyclic pitfalls aren’t that much of a concern. Holding is encouraged in real estate investment and for a good reason.
Developer/Investment Firm Credibility - Real estate unfortunately also suffers from litigation issues and these can be really tricky to find out. There’s no saying if big names are the safest, but having a credible portfolio is a good indication of the developer or investment firm being a genuine one. It is also beneficial if the project is well known and is being built as per the latest standards. A good quality project with all available details will attract more investors, buyers, tenants and prove to be more stable.
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