Risks of Real Estate Investing

Risks of Real Estate Investing
All investments carry with them some degree of risk. The
same is true with real estate investing. Despite the
promise of high rewards you should be aware with the risks
involved are more often than not just as high as the
potential rewards. This is why you need to take every
possible precaution in order to minimize your losses
whenever possible or at the very least are prepared,
financially and mentally to accept the consequences of
those risks if the time comes.

How can you protect your investment?

Know the real estate laws. It doesn't matter if you are a
novice or a savvy investor, ignorance of the rights and
regulations can put your investment at risk. You don't
have to become an attorney, but you should be brush up on
the laws that govern the market.

Stay informed with the health of the current economic
market. Is the economy in general still improving? What
is unemployment high? What was the rate of new home
construction in the last five years? All of these variables
are good indicators of whether property values will rise,
level off, or even see a correction.

Put at least 10% down when purchasing a property. Most
novice investors might think that going with zero down
loans is a great way to dive into real estate investing,
but zero down loans are very risky. A large down payment
will create instant equity and get you a loan at a lower
interest rate. This might reduce your cash on hand, it
will lower your risk and increase the degree of capital
appreciation of your investment.

Adjustable Rate Mortgages allow investors to purchase
property with less cash and an attractively low relative
rate. There are 1 year adjustable rate mortgages 5 year,
even 7 year. the number signifies how long the offered rate
is good for. Afterwards, the lender adjusts the rate
according to prevailing interest rates.

However, if you keep the property longer, that low rate
can climb several percentage points. Unless you sell or pay
down the principle on the property you can expect to be
stuck with higher monthly payments.

As the adjustable rate mortgage goes up, property values
are under pressure to level off or even decrease because
of the rise in interest rates. Your investment gets hit
twice. Of course, it's possible for rates to go down, but
that's less common and refinance is usually toward a fixed
rate, in those cases.

So, instead of being risky, take a long term view. Invest
as much as you can up front, make at least one extra
payment per year, lean toward fixed rate mortgages of the
minimum length you can afford. A 15 year mortgage pays down
the principle quicker, so you spend less on interest,
increases your equity rapidly, and usually carries a lower
rate.

Playing it safe will ensure maximum return on your
investment with minimal risk.

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