Investing in real estate can be a great way to make money and build your asset portfolio, but it also comes with a certain level of risk. Understanding these potential risks associated with investing in real estate is essential to success, especially as markets shift in 2023. In this blog, we’ll discuss some of the most common risks of real estate investing and how you can mitigate them. We will also discuss one of the best ways to protect yourself from potential losses. Remote work, rising interest rates, rent increases and changing lifestyles all factor into financial and personal decisions. That’s why renting or buying is more confusing than ever for investors and tenants alike. By understanding the risks associated with investing in real estate, one can make an informed decision when it comes time to invest money.
Read on as Rickman Properties details the 3 key risks in real estate in 2023 and how you can ensure that a good property investment is made.
Risk #1 – Economic Uncertainty and Market Volatility
Economic uncertainty and market volatility are two of the most significant risks that real estate investors face. The current global economic climate has created a financially unpredictable situation in which markets can feel volatile, with rapid changes in prices and values. Economic uncertainty and market volatility can make it difficult to determine how to invest in real estate, as prices can fluctuate drastically. In order to mitigate risk and ensure success when investing in real estate during uncertain times, it is essential for investors to have a well-thought-out strategy. This includes understanding the current market landscape, creating a diversified portfolio of investments, and utilising risk management techniques such as hedging. There is a flip side to every coin, however, even economic uncertainty. Many real estate investors will use the opportunity presented by foreclosed homes to buy cheaper real estate during this time. However, this strategy requires resources that first-time home buyers might not have.
Risk #2 – Rising Interest Rates
Rising interest rates pose a significant risk to the economy. When interest rates increase, it becomes more expensive to borrow money, resulting in an increase in mortgage rates, loan rates, and other borrowing costs. This can have a negative effect on consumers’ ability to purchase homes or take out loans.And of course, the real estate market is always subject to risks and changes. In fact, interest rates have recently been on the decline. This will have an impact on mortgage rates, loan rates, and other fees associated with buying and selling property in the UK and London in particular.
This interest rate drop represents some level of confidence in the near future for buyers as the overall two- and five-year fixed mortgage rates fell for a third consecutive month, with the average five-year fixed resting at 0.24% below the average two-year equivalent.
Since rising interest rates can mean higher mortgage payments for buyers, it creates more difficulty for average earners to purchase a home. It can also lead to lower rental yields for landlords as tenants may struggle to pay their rent due to higher loan costs. Furthermore, it could cause a decrease in demand for real estate as buyers may decide not to invest due to the increased costs associated with borrowing money. Current falling interest rates represent a good time to take stock of available properties if you’re looking to purchase in the near future.
Risk #3 – Lack of Liquidity
Liquidity risk, or the risk of not being able to sell an asset quickly enough to meet a financial obligation, creates significant obstacles in the real estate market. When there is a lack of liquidity in the market, it can be difficult for investors and first-time buyers alike to sell their properties and access cash when they need it. This can lead to missed opportunities or losses while waiting too long for buyers to be able to present payments. Conversely, if the market becomes too illiquid, investors may have difficulty obtaining financing for new investments due to low trading activity or curiosity about buying.
In 2023, the real estate market could face some hiccups due to a lack of global liquidity. As of June 2022, it was reported that 36% of UK workers are living month-to-month without extra cash for emergencies. Since rising interest and mortgage rates have caused loan rates to increase in response, it will be overall more difficult across the board for people to afford a home. The market could respond by seeing a decrease in demand for homes, which can lead to fewer buyers, resulting in even less liquidity in the market. As such, buyers may find it difficult to liquidate their investments quickly for cash, and might take a loss if they decide they need to sell a property quickly.
How to Mitigate Your Risk When Investing in Real Estate
All three of the issues above represent interconnected hurdles that impact each other as well as buyers. In order to mitigate risk when considering buying into London real estate in 2023, it’s important to have a well-seasoned London estate agent. This can be the secret weapon that allows buyers to delegate the difficulties in regulations and pricing to an expert in the field. Rickman Properties expert estate agents can ensure they provide their clients with the best deal for their London property investment, whether buying or selling. The bottom line? A well-connected estate agent like Rickman Properties can make all the difference in ensuring the best investment possible.
There are many moving parts when it comes to buying or selling a home, and Rickman Properties can help make sense of it all. Contact us here for a free quote.