Compared to other investment types, like stocks, annuities, and cryptocurrencies, real estate is widely considered to be a low-risk investment.
When we consider the characteristics of real estate, it’s clear why real estate investments often out-perform other investment types over the long term, providing the potential for returns that far outweigh any risk:
- People will always need a place to live. As a basic need, housing is an inelastic commodity, so it is less affected by changes in economic conditions than more volatile investments like stocks. This is one of the points in favor of real estate when you’re deciding to invest in real estate vs. the stock market.
- Land is a limited resource, so it is protected by supply-side scarcity. As Mark Twain famously said, “Buy land, they're not making it anymore.”
- Real estate is a tangible asset. Unlike stocks, which can, theoretically, become worthless, real estate gives you a physical property that will always retain some of its value, even if the market dips temporarily.
- Even if the housing market dips, it will always rebound. The economic collapse of the Great Recession, as terrible as it was, was a temporary setback in home values. They bounced back and continued to grow impressively in the mid-to-late 2010s and into the 2020s.
- Real estate investing is flexible. With multiple ways to invest in real estate like property development, house flips, and luxury homes, real estate investors can build a diverse portfolio to weather changing economic conditions.
Is Real Estate Investing Safe?
“Safe” is a word investors don’t typically like to use because it implies that there is no risk. Frankly, all investments inherently carry some risk. It’s the risk that affords investors the potential rewards. So rather than asking if real estate investing is “safe,” maybe we should be asking about the likelihood of losing our money by investing in real estate.
The fact is, you’re not likely to lose money on real estate investments. As a Forbes article points out, “You only lose money in real estate if you sell in unfavorable conditions or lose the asset to foreclosure.” Your real estate investment is secured by the property itself. In an extreme example, even if you lost the structure on your property due to a natural disaster, the land still has value. You really cannot lose your full investment in real estate.
Consider the “safety” of stocks as an alternative investment to real estate. Stocks are subject to unexpected changes in market conditions; they can see impressive growths overnight, but they can also steeply decline without warning. And, unlike real estate values, stocks prices don’t always rebound. Even if the stock market, as a whole, recovers from a sudden drop, there is no guarantee that the stocks in your portfolio will bounce back.
Or what about cryptocurrencies? While it’s true that cryptocurrencies have created Bitcoin millionaires, the volatility of the crypto market is too high a risk for most serious investors.
At the same time, failure to make investments is also risky. Investing in most mainstream investments is almost certainly safer than avoiding investing. If you don’t invest, your money can’t grow. It will languish away in a bank account, hopefully earning high enough interest rates to keep up with inflation. In fact, whenever inflation jumps, money held in savings accounts actually loses value. We saw excessive inflation in 1979 when inflation was over 13%, in 1990 when inflation was just over 6%, and in 2021 when inflation was at 7%. But when you invest in low-risk opportunities like real estate, the odds of growing your money are in your favor.
If your goal is to invest as safely as possible, you may want to consider US Treasury bonds, which are considered to be among the safest investments in the world with their backing by the US government. But at 2022 rates, your yield will be just 1.07% on a 12-month bond. In fact, to get over 2%, you’d have to tie up your capital for 30 years. For comparison, the one-year ROI on the average US residential investment property as of November 2021 was 7.5%.
What are the Risks of Investing in Real Estate?
The risks of investing in real estate can vary depending on the type of real estate you invest in. The risks of flipping houses, for example, can be different from the risks of luxury real estate development. But, in general, the risks of real estate investing include:
- Choosing the wrong properties or the wrong real estate markets.
- Vacancy losses while you fill your units with tenants.
- Unexpected problems with the structure.
- Tenants who fail to pay rent on time, which creates cash flow issues.
- Negative cash flow if your property expenses exceed your rental income.
- Comparatively low liquidity. Once your funding is tied up in a property, it can be difficult to retrieve your capital.
- Getting in at the wrong time. This is more of a risk with a short-term investment like flipping. Long-term investments have time to weather the natural ups and downs of the market.
The good news is that there are several ways you can reduce your investing risks.
How to Minimize Real Estate Investing Risks
Minimizing your risks starts with avoiding the most common mistakes made when investing in real estate. Mistakes like failing to do your due diligence, treating investing as a hobby, and under-estimating your expenses can all set you up for failure. By avoiding these mistakes, you dramatically reduce the risk.
Another way to minimize your risk is to build a diverse investment portfolio. Rather than putting all your cash into a single unit, spread your funds among multiple units. This way, if you run into unexpected issues with one unit, the others can help offset any potential losses.
And, finally, to minimize your real estate investment risks, you should leverage the experience of industry experts. People who manage real estate investments for a living will always know more about maximizing returns than a casual real estate investor. Why not take advantage of their knowledge, skill, and experience to set your investments up for success? This is where Gatsby Investment comes in…
How to Leverage Gatsby Investment to Lower Your Real Estate Investing Risks
Gatsby Investment is a Los Angeles-based real estate investment syndication firm. What is real estate syndication? In short, real estate syndication is like real estate crowdfunding, in which funds are pooled from multiple investors. But what makes syndication different from standard crowdfunding is the specific ownership structure; all investors in the syndication project become members of the LLC that owns the asset, managed by the syndicate sponsor.
Here’s how a real estate syndicate like Gatsby reduces real estate investment risks for accredited investors:
- Low minimum investments mean you don’t have to tie up as much capital in a project as you would if you were to purchase the property on your own.
- Low minimums also allow you to invest in multiple projects, giving you the opportunity to create a diversified real estate portfolio quickly and easily.
- With our flexible offerings, you can choose renovation projects that will be completed in six months to a year. This improves your portfolio liquidity compared to long-term investments.
- Expert property scouting and vetting means you get to choose from properties that have already been hand-selected by industry insiders. Our team of real estate analysis reviews hundreds of properties before selecting the property with the greatest return potential.
- You still get deal-by-deal control, meaning you choose exactly which properties to invest in, based on your unique goals and preferences.
- Your properties will be handled from start to finish by our experienced team of analysis, architects, builders, designers, and property managers. Having professionals manage every detail of your deal minimizes the likelihood of costly mistakes.
Building a real estate portfolio with Gatsby is fun and easy. Simply sign up on our website, get your accredited investor status verified, and choose from our exciting investment options.
Real estate investing might not be risk-free, but with proper management, real estate assets are wise, reliable investments.