How to Reduce Risk When Investing in Real Estate

All investments come with risk, especially real estate. Markets fluctuate, demand changes and other unpredictable variables can lead to a failed investment. While there’s no surefire way to protect your properties against all losses, there are ways to reduce real estate risk.

Diversify Your Locations

One effective way to reduce risk with real estate investing is to diversify your locations. Thanks to new technologies and the Internet, it’s easier than ever to find and purchase properties in any location. 

Diversifying your locations will safeguard your investments against potential losses. Let’s say that you have properties in Boston, Dallas and Tampa. If the economy in Tampa tanks and the rental market grows cold, you have properties in Boston and Dallas to make up for your loss. 

If you were to put all of your eggs into one basket, meaning all of your properties were in Tampa, then you’d risk losing all of your rental income.

Of course, having properties in multiple locations can be challenging to manage on your own. To make it work and to reduce the risk of poor management, you’ll need to hire a credible and trustworthy property manager.  

Focus on Multifamily Properties

Multifamily properties are inherently less risky than single-family rental properties. A multifamily property with four units is equivalent to having four single-family rentals. They’re all in one convenient location, which makes them easy to manage.

And if one tenant moves out, you still have three other occupied units (hopefully) that will cover the cost of the mortgage and other expenses. 

If you had four single-family rentals and one tenant moved out, you’d lose all income from that property. You’d be responsible for paying the mortgage, taxes, utilities and other expenses out of your own pocket. 

Choose Properties That Appeal to Average People

When many people get into real estate investing, their goal is to buy properties that demand premium rent prices – think the modern apartment building with all the amenities. While these properties can be lucrative, many investors find that sticking to properties that appeal to average people is the best option.

Why? Because in an economic recession, it’s those middle-of-the-road properties that will fare the best. Those living in expensive rentals will be downgrading more affordable homes.

And when the economy is doing well, more people will be looking to upgrade from cheaper rentals.

Focusing on rentals that are in the middle will ensure that you can weather a downturn and benefit from an economic upswing.

Go for Smaller Units

Smaller units tend to attract more tenants, particularly two-bedrooms. Two-bedroom units are exceptionally versatile. They’re favored by people on tight budgets and those looking to downsize.

Along with affordability, these units offer enough space for small families. They can be rented by single people or couples that want an extra room for an office. Roommates can share the space. 

Two-bedroom units will always be in demand. You don’t have to focus only on these smaller units, but having them in your portfolio can help reduce your risk.

There will always be risk when investing in real estate, but you can take steps to reduce those risks using the tips above.

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