- November 11, 2023
- Posted by: Masters
- Category: Blog
No one can deny the fact that if there is one sector that has successfully stood the test of time despite everything that the globe has suffered from, from economic recessions to lockdowns, it is real estate. The sector has successfully emerged as a stable means of investment in modern times. Whether it was the COVID-19 pandemic or the lack of opportunities, the sector showed growth and potential in the most distressing times known to mankind.
Despite market stability and the promise of better revenue, the sector is not risk-free. Some loopholes make this market as volatile as any other market. Therefore, newcomer investors need to understand, learn, and align themselves with the risks of investing in real estate in 2023.
Today we will be dissecting the most common risk factor that makes this sector a volatile and risky investment venture for beginners and sometimes for seasoned investors as well. Make sure to stay with us till the end!
Table of Contents
Real Estate Market Volatility
One of the biggest and in-the-nose risk factors of the real estate market is the market itself. The dynamics and trends of the real estate market are not predictable like the weather and tend to change or morph daily. One day it is a buyer’s market and the next day it will be in the favour of the sellers. The chances of probability are always low and predictability in the market is a distant dream. Even the most well-known market readers fall flat in predicting market behaviour. From the changes in government policies to the unexpected global crises, the market demands that investors stay at the top of their game.
Rental risks are the classic case of human-induced issues and problems with the real estate market. Apart from the dynamics of the market, no one can guarantee the mood and vulnerability that a landlord might provide the tenants with. From credit risks to the gap in the cashflow, the rental risks are a nightmare in the real estate sector.
Finding the Right Tenant
While there are some risks for the tenants, the volatile real estate sector also boosts some problems for the landlords as well. One of the most prevalent issues is finding the right candidate for the house. Finding tenants who are willing to pay the rent on time and are not making your life hell by damaging the property is equivalent to finding a needle in a haystack.
All the landlords can do is ensure that the credit history of the tenant is strong and strain-free. This activity can ensure them the promise of better tenants for their property. Otherwise, the inability to find the right tenant factor plays a major role in making real estate a volatile market and an unstable venue for investment at the current time.
There is no denying the fact that Pakistan’s economic condition tends to fall flat because of several sociopolitical issues that are rotting the society. This lack of stability can sometimes reflect on the condition of the real estate as well. Not only does it make the market volatile but also risk-prone. An investor should have a keen eye on the market dynamics and the economic conditions before making a hefty investment in the sector. The worth of the rupee and the actions of the political parties all tend to project the consequences in the real estate sector.
Location, Location and Location
This is one of the most heard-about and quoted statements in the world of real estate. This is because in the world of real estate, setting eyes on the right property is what gets your ball rolling. One wrong move about the property location and all of your investment will go down the drain. That is why when you are out there searching for proper location prospects, make sure that you are resourceful and visionary. These are the two aspects that will ensure you a risk-free real estate experience. Make sure to keep a checklist of all the things that residents and investors might ask you in the context of real estate investment, as per the location.
This is the risk when the people either investors or the residents, fail to understand and properly estimate the repair and maintenance cost of a structure. That is why one of the biggest pieces of advice to stay safe in a volatile real estate market is the proper examination and estimation of the repairs or maintenance if you are settling for a pre-designed and constructed building. Some of the common things that fall under the category of infrastructure risks are as follows:
- Theft/Property Damage
- Use of Low-Quality Construction Material
- Poorly Drafted Written Documents/ Consent Forms
- Safety Hazards and Risk Potential for the Workers
- Lack of Skilled Labour
- Poorly Designed Floors/ Masterplan
Lack of Liquidity
Liquidity or cash flow is a medium in which the cash flows inside the sector after all the payments for taxes, insurance and mortgage claims have been made. It is the base and one of the core things that keep the real estate market running for ages. A lack of liquidity is a market condition in which the incoming funds are far less and in-between as compared to the outgoing investments. The flow is stuck and disruptive and the market is on the brink of collapse.
Listed below are some of the reasons that can contribute to a loss in cash flow over time.
- Underestimating Maintenance Costs
- Renting the Property at Low Rates
- Extended Periods of Property Vacancy
- Acquiring Construction Loans With High-Interest Rate
There is a plethora of different sorts of taxes that real estate investors should equate themselves with. Some of the most commonly found taxes in the department are as follows:
- Capital Gains
- Income Gains
- Property Taxes
A prevailing issue with these taxes is that they can fluctuate at any given moment in time. Which can put the investor at risk. That is why property taxes are a nightmare for some investors, especially in a highly unstable real estate market. The issue with property taxes is that they are not fixed and tend to change from time to time.
Another risk of investing in real estate in 2023 is the legislative jargon that comes with it. Now these are the sorts of things that change from government to government, depending on the government’s strengths and safe corners. Therefore it makes the volatile real estate market all the more risky, especially for young investors or even for some seasoned investors.
Here are some of the legislative risks that people might suffer from:
- Registration Procedures
- Rent Control Laws
- Tenant Laws
Having a strong and skilled resource who understands these things is more pertinent than ever if you want to stay risk-free in the real estate market.
The aforementioned context contains great depth about the ways a real estate investment can be risky. From negative cash flow to unprecedented market behaviour, understanding and finding ways to coexist in the market is essential, especially from an investor’s point of view. Make sure your groundwork is complete before you decide to dive deep into the real estate sector.
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