What are the risks associated with investing in real estate?

As with all investing, there are risks to be aware of. Let’s take a look at some examples of the most common risks.

  1.  Extended vacancy

An extended period with no tenant can reduce rental income returns. 

How to minimise the risk? By choosing properties in cities and neighbourhoods with a strong and sustainable rental demand.

  1. Tenant default

If a tenant is no longer able to pay rent, the rental agreement will have to be terminated. This process can be time-consuming, require some legal costs and could lead to lower net rental income.

How to minimise the risk? A thorough tenant selection process by the property manager.

  1. Operational and maintenance expenses

A property’s operating costs can increase faster than projected, exceeding rental income growth. There can also be unexpected repairs, not covered by the insurance. This can lead to a lower net rental income.

How to minimise the risk? Prior to purchasing the property, doing a deep due diligence and technical inspection to uncover all needed repairs and renovations.

  1. Housing market risk

The housing market has shown strong performance due to high demand and a housing shortage. However, future performance can not be guaranteed and there have been periods of declining house prices in the last 25 years (read more).

How to minimise the risk? Invest in real estate with a strong passive income through rent and invest for the long-term as it reduces the impact of potential periods of dips in housing prices. Hence it is advised not to invest with money that you might need in the short term.

Few important things to keep in mind:

• As with all investments, diversify your portfolio over time as it limits your exposure to a single property and hence reduces your risk.

• Investment returns tend to increase relative to the length of your investment horizon, so we advise to not invest money that you might need in the short term and only invest money that you can afford to loose. Long term investing also help reduce the impact of potential periods of dips in housing prices.

For additional information and a comprehensive overview on the most important risks we will also refer you to the property specific AFM information document.
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Updated on:
December 7, 2022
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