PROPERTYSPARK ARTICLE

Main Business Risks in Real Estate and How to Mitigate Them

Market Volatility

Despite real estate prices rising more quickly than inflation, the industry is still not immune to market volatility.

External market forces like economic downturns, interest rate fluctuations, and shifts in consumer demand will still dictate the prices of rent and property.


Mitigation Strategies

Diversification is your best weapon against market volatility. After all, being overly reliant on one market segment leaves you at the mercy of that market’s whims.

If you can, don’t pigeonhole yourself. Get properties in different locations and spread your investments across the different property types (residential, commercial, industrial, etc.).

Of course, there will be different markets for these differing types and locations, so be sure to research before you commit to an unfamiliar property type or place.


Natural Disasters and Environmental Risks

Nobody wants to stay in places that are prone to flooding, located on fault lines, or near volcanoes!

Land and property are always at risk of damage from natural disasters like:

• Flooding;
• Earthquakes;
• Tsunamis;
• Hurricanes;
• Volcanic eruptions.

Even man-made disasters like fires should be considered.

Not only are repairs expensive, but the demand—and thus value—for properties in high-risk areas is lower.


Mitigation Strategies

Before investing in property, always consider how vulnerable the location is in the first place.

For example, while an earthquake can strike anywhere and a fire can ravage any building, some places are also more flood-prone than others.

Of course, no place is completely immune to natural disasters. Adequate insurance coverage is therefore critical. Incorporating resilient design principles is a must when developing new structures as well.

Lastly, evacuation and disaster recovery plans should always be created to protect employees, tenants, and physical assets.


Tenant and Vacancy Risk

Getting a tenant—and getting your tenant to pay on time—isn’t always so easy. Both of these can be affected by larger economic forces, such as increasing unemployment leading to people renting property less.

Vacancies can lead to financial loss for landlords, especially since many of them typically strategize to use rental income to pay off amortization loans.


Mitigation Strategies

Market research is everything. In addition to knowing an area’s environmental vulnerabilities, determine if there is strong—and consistent—rental demand in that area.

You should also implement strict tenant screening measures to ensure that you’re only renting out your property to people who can pay.

If you’re having trouble getting a tenant in the first place, offering flexible lease terms (especially during times of economic difficulty) can attract more people.


Financing and Credit Risk

As profitable as real estate can be, it’s also costly to get into, requiring substantial capital investment.

And so most people borrow money to invest in real estate. However, this can oftentimes be tricky, with constant changes in lending practices, interest rates, and credit markets.

It can be difficult to borrow funds. And if you’re having trouble paying off loans (due to tenant vacancy, for example), foreclosure or forced liquidation may be inevitable.


Mitigation Strategies

Maintaining a strong and credible financial profile is crucial to doing business with banks and lenders. Try to secure financing during periods of economic stability as well, even if you don’t need the money immediately.

Diversifying where you get funds is also a wise move, as to not being overly reliant on one financial institution. Lastly, make sure to regularly review debt policies and optimize your strategies to manage these debts.


Regulatory and Legal Hurdles

With how large the industry is, real estate is highly regulated. Buying, owning, and operating a property involves navigating a complex web of laws and regulations governing:

• Zoning regulations;
• Building codes;
• Taxes;
• Environmental regulations;
• Property rights;
• Renting regulations.

Non-compliance with these laws can be extremely costly! And, in fact, 67.5% of UK landlords cite legislation as their biggest source of frustration.


Mitigation Strategies

Although much easier said than done, simply conduct due diligence and stay up to date with all relevant regulations and follow them.

This is why anyone in the real estate business works closely with lawyers to ensure their business operations remain compliant.

Additionally, knowing the area’s regulations can help you decide whether it’s profitable to invest in real estate there!


Cybersecurity Threats

And due to such strict regulations, everything in real estate needs to be documented. These documents—now mostly digitized nowadays—can contain highly sensitive data, such as transaction details or bank accounts.

Because of this, real estate firms are a common target of cybercriminals. This can lead to financial and reputational damage to the firm.


Mitigation Strategies

Anyone involved in real estate should be implementing cybersecurity measures.

Using VPNs should be the first line of defense. In case you don’t have one yet, you can get a VPN here.

Firms should also invest in cybersecurity insurance, use secure and encrypted communication channels and two-factor authentication (2FA), and regularly update their software.


Operational Risks

In the day-to-day management of rental property, expect the unexpected.

Damages, maintenance failures, inefficient or incompetent management, lapses in tenant service—it can all result in quite a headache (and a loss of money).


Mitigation Strategies

There’s really no remedy other than quality operations and consistent maintenance.

Properties should always be subjected to routine inspection and maintenance. Small problems can quickly balloon into larger ones, so fix anything that can be fixed ASAP. It’s a rookie mistake to only be concerned once glaring issues arise.

Also, make sure to hire experienced and competent managers and staff. Unless you’re directly involved in the daily operations, they’ll be the ones largely responsible for your property.

Conclusion

Real estate is only as risky as it is potentially profitable. From natural disasters to tenants not paying rent to broader economic trends—not everything is unfortunately under your control.

The best you can do is to be prepared to expect the unexpected.

Staying proactive about these issues gives your property the best chance to stay in shape—and stay profitable!