Real estate investing opens up a passive income stream and diversifies your investment portfolio, but these gains come with different risks that you should know in advance, especially if you’re new to REI.
Gus Dahleh wants you to become aware of these potential risks, so you can avoid them up to a great extent. So, let’s get started:
Who is Gus Dahleh?
Gus Dahleh is a real estate entrepreneur who specializes in commercial real estate development with a primary focus on distressed assets. Since 2010, Dahleh has acquired over $50 million of commercial real estate assets and entered into long term leases with JP Morgan Chase Bank, AT&T, Walmart, Sam’s Club, and CubeSmart. Gus Dahleh has also developed a niche in the cell antenna industry by selling lease revenue to publicly traded REITS which include American Tower and SBA Communications Corp. Gus Dahleh began his financial markets career as an equity options trader at the Chicago Board of Options Exchange. Gus Dahleh has developed proven option strategies for the U.S. 30 Year Treasury Bond and Gold Futures based on seasonal and technical patterns. Gus Dahleh has a proven track record for providing direction on how to maximize the value of the commercial real estate and financial market investments. For more information, visit GusDahlehBlog.com or follow Gus on LinkedIn, Twitter, Instagram, Youtube, and Facebook.
Real Estate Investing Risks
Here are seven risk factors you should know before investing in a commercial property:
1. Market Unpredictability
The real estate industry is fast growing and evolving, making trends extremely unpredictable. This volatile market is well-known for ups and downs with an ever-changing economy. So, you can’t say that positive trends will continue tomorrow.
Since the real estate industry heavily relies on the economy, there’s no guarantee that you’ll make a profit out of selling an investment property. Suppose you buy a commercial property when demand and values are high, but you end up selling it for lower than the purchase price because its value has gone down with changing market conditions. You should be aware of this dynamic and keep a tab on market trends. According to Gus Dahleh, this will help you make informed investment decisions while reducing risks.
2. Location Risk
When it comes to real estate investing, location plays a major role. Gus Dahleh agrees with experts that when you buy a commercial investment property, you should consider location as the primary factor.
Investing in a bad location can result in a poor investment in the following ways:
- Location determines supply and demand. You might think that investing in a low-priced property is good, but certain locations can have too many investment properties in the area and yet have no growing population or job market.
- Avoid locations with higher crime rates: These locations usually have lower prices and high occupancy rates. Moreover, these would lead to high repair costs and complications of legal matters.
- Location determines appreciation. Low appreciation leads to slim or negative returns when an investor decides to sell the commercial investment property. Over the past 10 years, Gus Dahleh has invested in California real estate, and property prices have increased 300%.
#3 Risk of Depreciation
Depreciation is the opposite of appreciation. Commercial investment properties often increase in value over time. But this is not guaranteed for all properties you invest in. So, it’s easy to run the risk of investing in a commercial property whose values drop over time.
The best way to avoid depreciation, according to Gus Dahleh, is to research carefully and perform market analysis. Study the economic growth of the property location as well as the real estate industry. You increase the chances of property appreciation with all of these efforts.
#4 Lack of Liquidity
Liquidity refers to the ability to access the money within your investment. Commercial investment properties are illiquid. So, it’s often challenging to convert them into cash.
Selling a commercial property is difficult and takes time. When you try to sell quickly under pressure, you may face a significant loss on your investment.
This lack of liquidity makes many investors hold their investments for longer compared to other investment types. Gus Dahleh believes this is risky in case you need instant cash in emergencies.
#5 Financial Risk
Financial risk from debt largely reflects uncertainty about residual equity returns when using debt financing. Debt increases the return’s variability. Increased leverage could result in increased return, but you must pay back debt before the equity holder can lessen or even negativize returns.
Gus Dahleh notes that financial risks also include interest rate risk. Significantly large interest rates with a short-term or variable-term loan increase the property’s debt to equity. This further reduces the return rate to equity investors. Increased interest rates often decrease the price that potential buyers might be willing to pay.
So, make sure you thoroughly estimate a projected net operating income. This amount will help cover the debt and interest. More debt on the property could increase the risk of a shortfall.
#6 Strategy Risk
Is the property management team operating using a sound strategy? Is the property at full occupancy? Are they property managers paying attention to the curb appeal and amenities? Do they have improvement plans for the interior so that they can increase the rents? You need to understand every piece of the operator’s strategy before investing.
When real estate investors fail to pay their mortgage payments timely for a few consecutive months, they run the risk of foreclosure. This means you’ll lose your commercial property to the bank.
Foreclosures are risky because they make it to get any kind of bank loan in the future. So, to avoid this risk, make sure you conduct an in-depth analysis of the real estate market and the investment property you’re considering.
Make sure you never put any down payment, emergency funds, or anything on the investment property before doing this thorough analysis.
In addition to these, there are certainly other risk factors you must consider. These include investment timelines, tax implications, diversification priorities, and more. As per Gus Dahleh, the seasoned investor with over $50,000,000 in assets, you should take as much time as you need to research how to turn your potential commercial real estate investment into a big profit opportunity.