What you should know about the risks of real estate investing before doing your first investment

A real estate as an investment can be very rewarding, but also has some risks. In this article, I therefore explicitly want to have a look at some of the risks of real estate as an investment.

Investing in real estate is a popular way to increase your capital. But there are also some risks that should be considered. So in this blog post, we will look at the disadvantages of real estate compared to other forms of investment, such as stocks.

What are the risks of investing in real estate?

In my opinion, there are two major risks with real estate: the risk of rising interest rates and the risk that the property will lose value over time

The risk of rising interest rates: higher costs

Real estate that you buy with little money down a lot of financing carries a high interest rate risk. That's the risk that interest rates on your financing will rise. Although you lock in interest rates for a few years when you take out a loan for your real estate investment, at some point, those fixed rates will expire.

Since real estate is very expensive, you will usually still have a large part of your debt at that time. And with rising interest rates, you'll now have to finance it at much higher rates, which means your monthly costs will go up.

If you don't have enough margin in your project, your investment can tip into the negative, and you'll have to put money into the property every month instead of the property contributing to your increase in net worth.

The risk of rising interest rates: Falling house prices

When you buy a property as an investment, you have to cover the costs of your property with the rental income. The cost of your property consists of the cost of financing, maintenance and management.

If interest rates rise, the higher costs can lead to falling property prices.

If the cost of financing suddenly increases, but all other parameters remain the same, a property suddenly makes less return, and could even generate a negative cash flow.

Investors and also owner-occupiers know this, of course. So owner-occupiers can't spend as much money on the same property when interest rates are rising as they can when rates are low. And investors don't want to, because then the investment simply doesn't pay off. 

So all in all, at first fewer transactions take place, until at some point prices begin to fall to compensate for the increased costs.

The risk of a negative development of your location

The biggest risk with real estate is that the location where the property is located will start a negative development. If you have bought a property in a location with a negative development, you may not be able to sell it when you want to. This risk is greatest for a property in an already structurally weak region.

If you buy a property in a structurally weak region, you should therefore think carefully about how you see the future of this region and whether you believe that people will still want to rent your apartment in this location in 20 or 30 years.

If there is no more demand for the commodity "housing" at a location, your property will be worth as much as a refrigerator in the Arctic...

Conclusion

Real estate can be a very good form of investment, but it also has some risks that you need to be aware of. 

Besides the risk of rising interest rates, the main risk is the location risk. 

Therefore, if you want to buy a property and rent it out, you need to consider whether there will be enough demand for housing in the area in the future and if the rental income will be enough to cover your costs and leave you with some profits still.

Even though the list of risks from this article is certainly not complete, I hope to have been able to make you a bit more aware of the risks of real estate investments. 

Even though I think real estate is a very good form of investment, it is not without risks, as many like to claim!

If you want to learn more about real estate as an investment, also have a look at the other articles on this blog like "What are the advantages and disadvantages of buying an investment property with a 100% financing?" or "What is the gross initial yield in real estate?".