A Look at the Investment Risks
There is never a guarantee that a real estate investment will turn out to be a real money maker. In lots of storm wrecked cities in the south, people are finding out that the houses they bought are no longer worth even the original selling price. So before getting into real estate make sure you know the risks you are taking with your money. Real estate is considered a highly speculative market. There are so many external factors outside of the individual’s control that can make a real estate investment fail.
Some of the risks of a vacation rental property are listed here so that you will be able to make your decision based on the facts of this type of investment:
- Changes in the tax code could adversely affect the tax advantages of real estate investing.
- Significant changes in the region where your property is located such as the loss of a large employer or military facility will impact your ability to sell your property at a time when the market is full of real estate for sale.
- Other socioeconomic factors may also come into play such as high gas prices or periods of high unemployment making it unaffordable for many people to travel.
- Mother Nature can wreak weather havoc on vacation destinations and this can affect your ability to rent vacation homes.
- The performance of the financial markets will affect real estate investments as interest rates fluctuate.
Owning vacation property requires continual attention. Caring for your property will depend on your own skills in maintenance and repairs or you can contract that kind of work to a construction or renovation company. If you have the know-how you can save a lot of money that you would otherwise have to pay a contractor.
Property values, occupancy, and rental income will vary based on a number of factors. The rent you collect will provide you with most of your return from an investment in vacation rental property. The occupancy rates have to be high if you are going to realize the gains you are looking for. That’s why your choice of location is tantamount to a successful rental income venture.
You cannot always control the factors that can affect occupancy rates. A location may seem right at the time but will it hold its value over time. . Political and economic changes can adversely affect the popularity of your vacation spot; the forces of Mother Nature such as hurricanes, forest fires, and other natural disasters are all factors that can affect your investment. Once an area falls out of favor with vacationers, it can be extremely difficult to lure them back. It’s possible that you could end up with a property you cannot sell.
A liquid investment means you can get your hands on your money fairly quickly. Vacation rentals are not a liquid investment because like all real estate, vacation rentals are relatively difficult to sell quickly and there is some uncertainty about the selling price you can get if you do put the property on the market. One of the ways you can help protect your investment is to vary the types of other investment vehicles that you have in your portfolio – stocks, bonds and other types of securities can help tide you over during down times in the vacation market.
Investing in real estate usually means you will need a large outlay of capital. This is often the reason many investors avoid real estate holdings, especially in vacation properties. The cash needed to buy and maintain the property must be available.
Since your original capital investment is tied up in the property, it makes your portfolio much less liquid, that is, you can not readily get cash from the investment. So it may be tough to secure the amount of money needed to purchase property and later on it may be hard to get a buyer for your asking price. If you don’t have the capital or the financing for the investment you can consider alternatives such as a real estate investment trust or real estate partnership.
