Many private real estate investors get a sense of security and comfort from buying physical properties thinking that they are safe from risks. But investment in physical properties does not circumvent the nature of investment in which there is risk for every reward. The reality is that there are many risks involved in commercial real estate investing that need to be taken into account in relation to the expected ROI. Understanding the correlation between these two elements can help investors make calculated decisions that increase potential for profit. This article will present five different types of risks investors should consider while making decisions for private equity real estate investments.
- Operator Risk
One of the biggest risks in private real estate investment is the reliability of the operator. An investor should do due diligence and run a thorough background check to validate the credentials of the operator. If the operator has no experience working within the asset class of the property, the market they are getting into, or the scale of the asset, it should be a concern for the investor. A competent operator will keep the company of team members who can cover the weakness in their resume. - Location Risk
A location risk refers to the risk factors associated with the location of the property within the metropolitan statistical area (MSA). There are multiple factors when considering location risk including the primacy of the area, prospect for future development, crime rates, and others. Areas can be graded into categories of A, B, C, and D where the properties with the best grade have the most desirable and demanded area. - Asset Risk
Asset risk is related to the kind of building the investor has bought. In commercial real estate, the properties get graded into Classes of A, B, C, and D. Grading the property makes it easier and more straightforward to get an idea of the age and condition of a building. If an investor invests in a property that is on the lower side of the grade scale, the risk reward factor for the property might be shaken unfavorably. Impeccable strategic planning will be required for renovation to put value in the property to make the business plan work. - Financial risk
There are multiple financial factors to consider when making a real estate investment such as the terms of investment, amount, duration, and rate of return. The potential rate of return should always correspond to the scale of the risks involved. For instance, buying an expensive property in a prime area involves very little risk, but also equally little chance of making returns. On the other hand investing on a reasonably priced property in a sketchy area but with a high chance of development in the future involves more risk, but also more potential for making substantial returns.
Conclusion
With the right property choices, real estate investors can earn enormous returns. But investing in real estate is not without its own set of risks. Every investor should consider these risks carefully during making investment decisions to maximize their profit opportunities.
Managing these real estate investments risks is easier said than done. Here at Left Coast Green, we assess and analyze the responsibilities, risks, and other related factors of clients’ real estate investments to maximize their profit opportunities. We also offer investment property loans to help our partners achieve their investment dreams.