Real estate investing can be a lucrative and rewarding experience, but it also involves significant risk. There is a lot of money at stake and it’s important to do your due diligence before making an investment. As the saying goes, risk management starts on the buy, so it’s crucial to identify and mitigate any potential problems before you close
the deal.
Here are five major factors to consider when evaluating a real estate investment:
1. Poor Location/Bad Real Estate
One of the biggest risks in real estate investing is purchasing a property in a poor location or with significant structural issues. To avoid this, it’s important to thoroughly vet both the location and the property itself. When looking at the location, it’s important to approach it like a funnel, eliminating any areas that don’t meet your standards and
requirements. This will help you avoid explicitly bad real estate. The goal is to make sure the location is safe, attractive and has potential for growth.
2. Bad Purchase Price (Overpaying)
Another major risk in real estate investing is overpaying for a property. This can happen if you don’t have a clear understanding of the market and the value of the property you’re considering. It’s crucial to research comparable properties in the area and use this information to determine a fair price for the property you’re interested in.
3. Not Factoring in the Property Tax Reassessment
It’s also important to consider property taxes when evaluating a real estate investment. Property taxes can significantly impact your bottom line, so it’s important to factor them into your calculations. Be aware of any changes to the property tax rate, such as a reassessment, that could impact your investment.
4. Not Correctly Allocating for Capex
Capex, or capital expenditures, refers to the costs associated with maintaining and improving the property. These expenses can add up quickly, so it’s important to allocate enough funds to cover them. This may include repairs, renovations, and upgrades to the property.
5. High Leverage
Finally, it’s important to be mindful of the level of leverage you’re taking on when investing in real estate. High leverage can amplify the returns on your investment, but itcan also amplify the risks. Be sure to carefully consider the amount of debt you’re taking on and make sure it aligns with your overall investment strategy.
By considering these five factors, you can better assess the potential risks of a real estate investment and avoid making a bad deal. At A360 Capital, we have a ruthless adherence to underwriting standards, which makes it relatively safe for our clients to invest in good real estate. By doing your due diligence and avoiding major pitfalls, you can increase the chances of making a successful real estate investment.