Hello all, I would like to pick some brains here to identify risk factors associated with REI. I did a bit of Google searching for some information, and not surprising Wikipedia provided me with the best quality information. That said, I wanted to know if anyone on this site had any other risk factors that they could share with me and the rest of this forum (from direct experience, word-of-mouth, textbook situations, etc).
When responding, please include your opinion regarding best methods to mitigate the problem and the likelihood of it actually occurring.
Fraudulent sale
Adverse possession
Environmental contamination
Building component or system failure
Overpayment at purchase
Cash shortfall
Economic downturn
Tenant destruction of property
Underestimation of risk
And some background information about myself: I am a recent college graduate, employed in the financial sector, that is interested in making some income on the side. I am researching the real estate industry and hope to make my first purchase in the next year or two. I am attracted to REI due to the timing (subprime mortgage crisis = overhang = low prices) and the long-term viability of the market (people always need a place to live). This is my first post, hopefully not my last, and I hope to meet some interesting, helpful and experienced folks here.
In my opinion, the biggest risk is DOING NOTHING AT ALL.
You are a college grad and working. Where are you living? Are you living at home and saving money for a real estate purchase? If so, good for you. Read Hoosier’s posts on saving with that plan.
Or are you PAYING RENT AND HELPING A LANDLORD BUY HIS/HER PROPERTY?
If you are, that is nice of you. That is what we landlords like.
Now is the time to get serious. Not worry about future potential problems, which can’t be solved until they exist. Now is the time to set out your game plan. If you do it here, others will help you fine-tune it.
Many people you know will tell you horror stories about the risks of real estate. We can tell you how to avoid them once you have a plan.
You shouldn’t wait to start. Now is the best real estate opportunity time of maybe your lifetime. It is time to come up with a concrete plan.
I only do lease options, so there really is no risk, but if you are going to be purchasing real estate, I’d say the biggest things to make sure of, are:
The purchase price being where it needs to be (not overpaying)
Knowing your exit strategy before you purchase. (rental, lease option, flip,wholesale, etc.)
I agree the biggest risk is doing nothing at all, ,the only thing you list that I ever consider is cash shortfall,can some of the other things happen, sure, but I dont worry about having a car wreck before I get in my car, I just drive in a way to stay as safe as possible. if I have a wreck I have the proper insurance in place
Find someone to follow around, help, go to REI meetings,is there risk, yes, there is risk is anything
I’d say it depends on the area or aspect of REI that you’re considering. John’s (pilot76180) risk associated w/ his business is different than furnishedowner’s or mine b/c each of us invest in RE differently. In most cases, your own financial health is going to determine a lot b/c you’ll need financing to buy and hold. This won’t necessarily apply if you’re doing things like lease options or bird dogging. For buy and hold (landlording), there are tons of risks…buying too high, overestimating rent demand and revenue, underestimating rehab costs and vacancy periods, finding termite damage after your purchase, having to replace major system components (HVAC, roof, electrical, structural). That’s all before you put a tenant in there. Then you have to worry about deadbeats giving you every excuse to not pay the rent or tearing the place up.
There are plenty of horror stories out there about people who’ve lost their shirt in REI, but there’s also a lot of other success stories. If it were easy, everyone would be doing it. Some people can’t even keep their sock drawer organized and will never own a house…much less invest in RE. You can mitigate some of these risks by getting properties inspected prior to purchase (if you can’t do your own inspection and know where the problems lie). You can and should do some type of tenant screening prior to letting anyone into your properties.
Depending on your financial situation and risk tolerance, you can go into different areas of REI where you’ll feel comfortable w/ the risks. If you’re trying to bird dog for other investors, you basically just have the money spent on gas to travel around and whatever money you would spend on trying to find investors to buy the property you’ve found. A lot less risk and expense there than to buy a bunch of properties, have to keep them up, and keep them filled to keep making it work each month.
Justin0419, thanks for the helpful response. If there any readings (preferably online articles) that you could recommend, please do.
With respect to structural/component risks and environmental risks (e.g. lead, asbestos), I figure I could hire a home inspector to inspect the property. Do you have any experience working with home inspectors? If so, do you have any pointers about selecting an inspector? What are your thoughts about hiring home inspectors for potential REI purchases as opposed to inspecting the property yourself?
I think the forums here are packed with great information. I suggest you find what aspects of REI interest you and then start reading every thread in the forums that relate to your goals.
I’ve hired home inspectors in the past for my personal residence purchases. I haven’t hired inspectors for my rental house purchases, but have a friend who will check out stuff for me if I have questions. I buy cheaper houses for low income rentals. They’re usually small and basic. I can fix a good amount of things myself and have gotten comfortable finding issues with these types of houses so I just inspect them myself.
I think one of the best ways to find a home inspector is to check w/ several Realtors and see who they use for deals. If you call enough Realtors, you should find a consensus of who to go with.