Factors that Make CRE Investment Unsafe
Investing in commercial properties is always considered lucrative due to the returns on investment.
However, investing in commercial real estate is fraught with numerous risks.
As an investor it is imperative for you to know about the risks associated with the commercial real estate sector.
Here are the factors that make commercial real estate investment unsafe.
Bad tenants
Liquidity risks
Leverage risks
Counterparty risks
BAD TENANTS
People invest in real estate for the sake of cash flows that are received in the form of steadily rising rental payments.
The assumption behind this cash flows is that investors will always be able to find good tenants.
However, research has revealed that there is a good chance that investors may not always find a good tenant.
Bad tenants are rated as the number one risk by most of the experienced commercial real estate investors.
LIQUIDITY RISKS
Commercial real estate investments are probably the most illiquid as compared to other investment options.
Because the amount of money required for real estate investment is huge & it also requires commitment from the personal finances of the investor.
Thus, if you want to exit a property, then there is no ready market which will provide minute to minute quotes for your property.
This illiquidity needs to be priced into the real estate investment to ensure that investors are not making a bad decision.
LEVERAGE RISKS
As investing in the CRE requires huge capital, over two-thirds of real estate that are bought & sold in any market have leverage attached to it.
Individuals generally buy a commercial property with a mortgage with an extended period for settlement of dues.
In addition to that, the interest that is due on the mortgage is several times the original amount borrowed.
As commercial real estate is leveraged so highly, it exclusively relies on the property prices rising continuously.
COUNTERPARTY RISKS
Many individuals buy unfinished real estate as they are cheaper and developers are willing to provide more favorable financing.
However, this has risks attached to it as investors become vulnerable to default by the developers.
Most of the time developers are unable to get the required permissions from the local authorities & the project gets delayed.
Due to this investors end up losing a portion of their investments & the real estate investment projects are prone to counterparty risks.
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