So, what are some risks and concerns to take into consideration when invest-ing in real estate? Here are a few of the more common ones: MARKET FLUCTUATIONS Like all investments, real estate markets fluctuate. No one can predict with 100 per cent accuracy or influence how the real estate market will perform, so trying to time the market over the short term is risky. Having a thorough understanding of key indicators that impact the long-term viability of real estate markets – and, of course, knowing where to find this in-formation and having the time to research the topic – can help reduce risk. However it cannot be eliminated altogether. LIQUIDITY Generally, it is accepted that real estate is not as liquid as stocks. However, there are real estate instruments that offer some flexibility in this area. Understand-ing all the real estate investment options available and restrictions associated with your ability to “cash out” is critical. It is important to be clear in prioritizing the importance of this factor. Don’t confuse “must have” with “nice to have,” as it may limit your options. CASH FLOW Risk increases for investors when they invest beyond their means. Close evalu-ation of the cash flow of the property is important to determine whether or not the investment is suitable for the inves-tor. There are several factors to consider that impact this risk, including vacancy factors, increasing operating expenses, decreases in rent and interest rate fluc-tuations, to name a few. Budgeting for higher than expected costs and conser-vative income expectations for a worst-case scenario is an approach that should be considered in order to determine manageability. Assessing risk should always be from the perspective of difficult time periods and one should plan accordingly to man-age risk. Budgeting from an optimistic viewpoint only is not being objective or prudent. INTEREST RATES Like the market, interest rates fluctuate. This can lead to an increase in the cost of borrowing amd affect cash flow perfor-40 • CANAdiAN CHiROpRACTOR | MAY 2011 mance. Be aware of these ongoing risks with variable rate mortgages and upon renewal of fixed rate mortgages. Choose appropriate financing terms and bud-get accordingly. Plan for where interest rates may be, not just where they are now. Speaking with a mortgage special-ist or an experienced lending officer at a bank is helpful in choosing the right mortgage product to balance cost sav-ings (of lower interest rates) with flex-ibility in options (pre-payment, provi-sions for increasing interest rates, etc.). VACANCY This is probably the most common con-cern most people have with real estate investing. Not only does this impact the cash flow, but also it can be a major inconvenience. A few simple strategies that are effective in reducing this risk include: • taking advantage of vacancy protec-tion programs – also known as pro-portional profit sharing programs – usually set up by the property management company • utilizing professional licensed prop-erty management companies • doing your homework! Invest in desirable properties with good quality tenants. Nonetheless, budgeting for the even-tuality of occasional vacancies is a must. PROPERTY MANAGEMENT Managing your investment properties can be very time consuming and frus-trating. Inexperience in this area can dramatically affect the return on your investment and even cause more head-aches. Using reputable, licensed prop-erty management companies can help reduce this risk. TENANT DAMAGES Bad tenants can cause serious damage, re-sulting in unexpected costs. Although you cannot eliminate this risk, having profes-sional property management companies that have the resources and processes to screen applicants carefully to ensure good tenants occupy the project can minimize this risk by eliminating them before they enter. Professional management compa-nies also know the proper procedures (different in each province) for removing problem tenants without creating further legal issues for property owners. PROJECT MANAGEMENT Managing the improvements or reno-vations to add value to the property, to increase rental revenue or to reduce ongoing operating expenses can be very frustrating, time consuming and com-plicated. Making improvements can, however, have a significant contribution to the overall performance of the invest-ment. Knowing where to spend money to maximize returns is a real science and can vary significantly in different mar-kets. Inexperience in this area can prove to be very costly not only financially, but also in terms of the investment time frame. CONTROL AND INVOLVEMENT Clarity in how much control and in-volvement the investor wants is im-portant. Investors should be honest with themselves about the amount of time they will commit and the level of expertise they have to navigate what can be, at times, a very complicated and time-consuming world of real estate investing. There are many real estate invest-ment products available. Each has its unique characteristics, so it is impor-tant for investors to educate themselves about the advantages and disadvan-tages of each and choose the products appropriate to their needs and profile. Knowledge is power. As with all in-vestments, there is no way to eliminate all risks completely and simply ignor-ing them is not an option that any suc-cessful investor would recommend. Knowing is better than not knowing. There are many strategies and systems successful real estate investors utilize to address the challenges discussed here, and many others. A worthwhile ap-proach to note is to take a moment to prioritize which risks are most impor-tant for each individual to address and then focus on ways to reduce them to a more manageable level. By gaining awareness and knowl-edge (of both the good and the bad) individuals can participate with more success and confidently take advantage of the tremendous benefits real estate investing has to offer. In turn, they may experience for themselves an avenue of investment that has helped countless ordinary individuals secure a great deal of wealth. • www.canadianchiropractor.ca
Chiropractic + Naturopathic Doctor May 2011: Page 40
