MITIGATE INVESTMENT RISKS
How to Mitigate Three Common Real Estate Investment Risks
By REI Editorial
As with any asset class , real estate investing carries its own set of industry specific risks . Whether you ’ re investing into commercial real estate or residential rental property , there ’ s always a chance of coming up short in terms of returns , and it ’ s not difficult for a first-time investor to end up in a deep financial hole .
REI identifies three of the most common risks that property investors face in South Africa and looks at some of the strategies that they employ to mitigate them .
1 . SYSTEMATIC RISK
Markets are always in flux and will experience several ups and downs related to the local economy , geopolitics , interest rates , and other market trends . While it ’ s impossible to fully insulate yourself from these risks , there are ways to lessen its negative effects .
A common way to lower risk is to diversify and invest in different types of properties in different geographical areas . South African cities tend to have their own boom and bust cycles . Having assets in multiple markets reduces risk from market downturns in one centralised market , however , it ' s important to note that buying properties in different locations might diversify market risk to a partial extent , if the wider real estate market falls , diversification is unlikely to alleviate the systematic risk successfully .
In the current global economic climate , it is wise to diversify the portfolio to included assets that are not directly related to the real estate market , this could be in government bonds or stocks representing industries that are independent of the real estate market .
2 . LIQUIDITY RISK
The property investor generally needs to have a long term outlook as the main disadvantage of real estate investments is the lack of liquidity compared to other types of investments such as mutual funds .
38 APRIL 2022 SA Real Estate Investor Magazine