May 8, 2012.Outline Introduction Managing risksAnalysis of real estateConclusion and Recommendation References IntroductionReal estate investment in rental property is extremely attractive. Many investors turn to market of real estate because this category of investment is long-term in nature. Investment in real estate brings high income to the investor depending on the property location. Even if property is profitable not every landlord possesses qualities of a good landlord. But those who have these features can make fortune as a result of profit emerging from renting an apartment. For an investor to buy a good property, the investor should start looking for a superior property to invest in, which will take time doing research and connections (Jhonson, 2012).
The investor should know his/her investment period and the longer the renting period the more rent will be earned freeing finances to further develop the property. It is desirable for investor to wait until they earn half of their initial investment and sell the property later when in good condition and when conditions in the market are more favourable. More investment risks can be encountered by the investor in case he invests for a short period.
Even though, the rent will appreciate in the next 10 years, it may also reduce its value after 6 years, particularly if the property was bought in unstable market. Therefore, in such a case the investor needs higher potential return so as to cover potential risks that may possibly arise. Ownership of property is appropriate for small investors in case of long-term investment as this will avoid market perturbations with rental income substituting investor’s day job (Jhonson, 2012). Managing risksIn property investment, the investor is exposed to a number of risks such as interest rates variations, housing prices, damages to property and tenant problems.
Financial products like fixed loans and insurance can assist the investor to mitigate risks linked with these problems (Mills, 2007). Risks can also be mitigated using other methods that include; First, investor should purchase property with very high yield which has a possibility of staying strong in future at a low price, with possibility for improvement. Second, carrying out market research in order to make sure that no malicious surprises are hanging about like the main employer is leaving the town.
Third, portfolio diversification by investing in various countries or in different assets, this prevents the investor from possible loss in one particular sector. Fourth, purchasing in relatively liquid section of property market makes property easy to sell as less people afford to buy more costly properties. This implies that inexpensive properties are the most liquid in this market. Finally, making sure that the ability to pay-off the mortgage is strong (Mills, 2007). In addition to common risks, there exists another type of risk which can be controlled by the investor which is the borrowing risks.
The investor has power over the borrowing amount and the more money the investor borrows the higher the investment leverage or financial power. It implies that the investor is likely to earn more cash but also lose more money. High leverage should be avoided because if the market becomes unfavourable the investor may not be able to service the loan which may force the investor into liquidation (Mills, 2007).