Introduction:
The property market is a lucrative investment option. The housing market has shown consistent growth over the last few decades, making it a reliable investment choice for those with capital to spare. However, there are many risks involved in investing in residential property. These risks can come from external factors (such as interest rates or economic conditions) or internal factors (such as construction quality). In this article we will explain some of these risks and how you can manage them so that you can maximize your returns on investment!
Rate of Return Risk:
Rate of return risk is the risk that you will not earn enough to cover your costs and expenses, let alone the debt payments.
If a property has an annual yield of 6%, but it costs you $100 per month in expenses, then your total income would be $600 per year (6% of $10k). If this were your only source of income, then there would be no way for you to pay off any loans related to buying or maintaining this property. You could try refinancing or selling it at some point in time–but those options are far from guaranteed and could take months or even years depending on how long ago one bought into this particular market cycle (which itself depends on local economic conditions). It is especially important that you hire a professional property dealer to get help and save yourself from all that chaos.
Interest Rate Risk:
Interest rate risk is the risk that the value of your investment will decrease as a result of rising interest rates. This usually occurs when you invest in longer-term investments such as bonds or mortgages, but can also impact shorter-term investments such as stocks and shares.
Interest rate risk is a type of market risk, which refers to changes in prices due to factors outside your control. For example: if there’s an economic downturn and people have less money to spend on goods and services (causing demand for those goods and services), this will affect the price at which they’re sold – meaning there’s less profit available for businesses who sell these products/services; this could lead some companies down into bankruptcy!
Construction risk:
This is the risk that your property will not be built according to plan, or that it will be incomplete when you take possession of it. This can happen for a variety of reasons, including poor management and/or weather delays.
Mitigation:
If you choose a reputable builder with experience building in the area and who has done work like this before, then this risk is greatly reduced. For example, for masonry work you should hire reputable masonry contractors in order to save yourself from a loss!
Market Risk:
Market risk is the risk that the value of an investment will fluctuate as a result of external factors, such as geopolitical events or changes in interest rates. Market risk can also be referred to as systematic or non-diversifiable risk.
Market risk can include:
- The value of an asset decreasing due to market forces (e.g., supply and demand)
- External factors affecting companies’ profitability and growth prospects, such as government regulations or natural disasters
Credit Risk:
Credit risk is a type of risk that is associated with the borrower. It’s the risk that they won’t be able to pay back their loan, and this can happen for many different reasons.
If you’re lending money, then you need to make sure that the person who takes out your mortgage has enough income or assets (or both) so they can repay it in full. This means looking at their credit history as well as checking their ability to meet repayments on time each month. If a borrower doesn’t have good enough credit history–or if they have missed payments in the past–then it’s unlikely that any lender will lend them money until things improve significantly.
Liquidity Risk:
Liquidity risk is the risk that you will not be able to sell your property quickly enough.
This can happen for a number of reasons:
- The market may be flooded with similar properties that are competing for buyers’ attention, so there aren’t as many potential purchasers for your home as you think there should be.
- Your property isn’t in very good condition and needs work before it can be sold, which means that it takes longer than usual to find a buyer and complete the sale process (or even just get an offer).
Lender risk:
Lender risk is the risk that a lender will not be able to recover their investment, or that they will not be able to pay back their loan. This could be due to several reasons:
- The property may not sell for enough money at auction, meaning that the lender cannot recoup their entire loan amount from selling it.
- If you have taken out an interest only mortgage with no repayment of capital until completion then there is no equity in your property and therefore if something goes wrong with your building project or development plans (which are often very complex), then this could mean that there is no money left over for you either! In order for any lender to take on this type of risk they need an extremely high return on investment (ROI) which means charging higher interest rates than normal!
Manage your risk:
As a property investor, you can manage your risk by diversifying your investments and having a strong understanding of the market.
If you’re thinking about investing in residential property, it’s important to understand how different types of risk affect you. If not managed properly, these risks can affect your ability to make money or even lose everything.
Conclusion
We hope this article has helped you understand the different types of risk involved in residential property investment. It’s important to know what you’re getting into before making a decision, so that you can manage your risk by diversifying your investments and having a strong understanding of the market.
