Property Location

F.E. Zuellig Avenue, Mandaue City, Cebu, Philippines

8 Risks of Real Estate Investment (and How to Avoid Them)

8 Risks of Real Estate Investment (and How to Avoid Them)

As of the second quarter of 2021, the Philippine real estate industry has nearly P126 billion in gross value added to the sector. Due to the growing middle-class population, sustained remittances from overseas Filipino workers (OFWs), and reopening of economies and borders, real estate investments continue to increase.

First-time investors can easily get attracted to this developing trend. Plus, it’s well-known that real estate has an easy-to-spot return on investment (ROI). However, it would be best if you didn’t jump into real estate investments without understanding the risks that come with them.

As with other types of investment risks, real estate investment risks exist and can obstruct your goals of growing your wealth. Depending on several factors, your comfort level with these risks will vary. For example, a younger investor may be more adventurous with their investments than an investor close to retirement.

Regardless of your age, personal circumstances, or current financial situation, these real estate investment risks are universal, and you must keep an eye out to avoid falling into an unfortunate financial situation.

1. Market

The real estate market is unpredictable. While there are forecasts on where the market is headed, nothing is set in stone. Many factors affect market conditions like economic forces of demand and supply, changes in government policies, and unforeseen national or international events.

A recent example that drastically changed the real estate market is the pandemic. With nationwide lockdowns, property investments in 2020 were slow or had no demand. As an investor, you should always stay updated with the market economy and understand its movements. Doing so will help you prepare for any downturns and determine which time is best to invest.

2. Structural

Not every property investment is flawless. Sometimes, there can be hidden structural problems such as mold or foundation damages. This can cost you even more because you’ll be handling unexpected maintenance and repairs.

To avoid this risk, only purchase from reliable developers with an impressive property portfolio. Alternatively, you can have the property evaluated by professional appraisers.

3. Location

As a potential real estate investor, you’ve probably heard of the phrase “real estate is about location, location, location” at least once. It’s true, real estate’s top appeal is its location. However, it can also be a risk.

Location is crucial for real estate, which is why you need to thoroughly assess if the area is a good investment. Research crime rates, find out if the town or city is newly developing or gentrifying, and check if the location is urban or suburban. The more you know about the area, the better.

For example, with Cebu as one of the Philippines’ outsourcing hubs, purchasing a condo in Cebu may be a good investment since economic growth is underway, generating more jobs and driving up property demand.

4. Liquidity

Real estate investments lack liquidity compared to other assets like stocks or gold. It means that if you’re in a dire situation where you need instant cash, you can’t easily make money out of your property.

Real estate investments are best for long-term returns. If your investment isn’t set on a long period and you need money, you may be forced to sell the property at a rock-bottom price. To mitigate this risk, you can apply for a home equity loan.

5. Cash Flow

Negative cash flow is one of the most common risks for property investors. If you don’t conduct your real estate market research and analysis, you could end up losing money. Negative cash flow occurs when your property loan payments, taxes, and other associated expenses exceed your rental income. It would help to calculate the potential costs and rental income before buying the property to avoid this risk.

6. Tenants

Rental real estate can come with the risk of difficult tenants who don’t pay their rent on time or at all. Don’t accept all tenants that apply for the space; bad tenants are worse than having no tenants because they can consume your time and expenses. Hence, you need to do a comprehensive screening process with your applicants to ensure these situations don’t occur.

7. Vacancies

Alongside difficult tenants, you also have the risk of high vacancies. Having no tenants for an extended period is a problem, too, because you don’t have rental income to pay off your financial obligations. You can mitigate this risk by offering competitive rental rates, marketing your property via social media, or listing the property with a trustworthy realty expert.

8. Property Depreciation

The opposite of property appreciation, property depreciation means that your investments lose value over time. Not all properties are guaranteed to appreciate, so you need to select your asset carefully. Do a lot of real estate statistics research and market analysis, then study your property’s location and economic growth to avoid buying real estate with depreciation potential.

Be More Confident in Your Investment Decisions

Whether you’re purchasing a house in Manila or a condo for sale in Cebu, you should be aware of the risks that come with real estate investments. For most of these risks, the solution is to research as much as possible to get a scope of the market forecast. By knowing what to expect with your potential investment, you can make more confident decisions.

If you’re looking to invest in your first real estate venture, Mandani Bay is the property and location you should check out. With its modern units and bustling area, the risks are minimal. Browse through Mandani Bay’s residences and invest in something worthwhile today.