Private Equity Real Estate investing sounds like a great idea, but just like any other investment opportunity it comes with its fair share of risks. Normally, the higher the risk is, the higher the reward potential you can get in the long run. Here you have a list with some common risks related to Private Equity Real Estate. They will help you assess a potential investment and see if it’s worth your time or not!
Market risk
You need to realize that some markets will evolve faster than others. Around 40% of the national job growth is in just 20 cities. That means you need to see the price evolution and the market history before you perform any Private Equity Real Estate investments.
Regulatory risks
Understanding the local regulations related to transactions, zoning and entitlements is extremely important. Nowadays every region has its own regulations, so you need to have detailed knowledge about the investment environment in that region.
Leverage risks
You want to avoid properties that are over-leveraged. These will usually have a narrow margin, and you want to stay away from those. They can run into problems pretty easily.
Property risks
There are situations when the property soil is contaminated with pollutants or chemicals, there might be risks of earthquakes or other problems like that. It’s imperative to know any property-related risks before you start investing, as that’s what will keep things safe for you.
Replacement risks
Sometimes properties might end up being less appealing to tenants that want something sleeker and more modern. That’s why you need to consider these things too for the Private Equity Real Estate investment, because you want your rentals to be profitable.
Credit risks
This type of risk appears when tenants can’t pay their rent. Since the property values are driven by income stream stability, the stronger tenants will have the higher value. Perform a financial analysis and study tenants to ensure everything is ok.
Liquidity risks
Is it possible for the property to be converted into cash quickly? Some of the relevant factors here include the property price, location, tenants, property type and many others.
Asset risks
The type of property you are investing in does matter a lot. Every asset has a certain demand, apartments are a lot more appealing when compared to a commercial property because these are consumer-discretionary.
Conclusion
It’s very important to analyze the market and asset before you perform any Private Equity Real Estate investment. Even if something seems very appealing, you will need to take some time to study every opportunity. Take all the risks presented above into account, they will show you exactly how good or bad the investment will be. You can’t just invest without taking all possible downsides into account. With the right attention to detail and a good plan, you will have no problem performing the right investment. At the end of the day, you are in control of your investments, and that means assessing the risks before investing is pretty much mandatory!