The real estate game attracts millions of investors who are seeking ways to maximize their earnings and potential net worth. Depending on your tastes, location and investment strategy, there are many different types of real estate investments to consider. From native land holdings to multi-unit apartment complexes, each investment strategy presents both opportunities and liabilities.
The real estate investment game isn’t all roses: there are plenty of potential downsides to investing in properties. Those who fail to understand these potential problems before investing could be in for a rude awakening in the future. In order to avoid that, let’s review some of the most common liabilities that appear when holding investments in the real estate market.
Taxation
One of the biggest potential liabilities in the world of real estate investment is abrupt shifts in tax rates on property and other affiliated services. As property taxes tend to change from year-to-year – not just in base rates but in terms of appraised value – you may be left on the hook for hundreds or even thousands of dollars more in liabilities compared to the previous year.
It is entirely possible to avoid this fate, as many real estate investors who are leasing or renting out their properties will pass on the added costs to tenants. One popular form of doing so involves a triple net lease investment: this agreement requires that the tenant be responsible for all taxes, insurance and maintenance costs.
Insurance & Disasters
Another liability for most real estate investors is the effects that insurance rates and potential disasters can have on their bottom lines. Insurance rates – just like taxes in general – can wildly fluctuate from year to year, and a potential disaster (flood, fire, vandalism, etc.) can strike at any time.
Even if you have done everything right, a potential insurance-related issue could create chaos for your investment strategy. In some cases, insurance companies might refuse to pay your claim. In other cases, an unforeseen occurrence that wasn’t covered in your policy suddenly appears. This is one huge liability that every investor must consider carefully.
Value
While it may be the one aspect most investors focus on intently, the value of the property isn’t the only potential liability. However, it is a huge one and one that can change dramatically over a short time period.
If an economic slump suddenly appears or conditions in the neighborhood change rapidly, the value of a given property can dramatically change (usually for the worse). Most real estate is subject to boom and bust cycles, and those holding investments with the intent of flipping them in the near future may find themselves suddenly exposed to market risk in the event one of these situations occurs.
Understanding the innate risks and liabilities that come with real estate investment is crucial before making any commitments or purchases. Ultimately, elements such as local tax rates, changes in neighborhood and economic conditions, and insurance-related issues can all pose potential threats to your otherwise stable real estate strategy. By knowing about these risks and planning ahead for them, you can dramatically mitigate the chances they’ll impact your bottom line negatively.