Real Estate Investment

Risks should always be the first element to be evaluated in any investment

. There has never been anything to suggest that real estate is so special that this prudent step can be bypassed. Nevertheless many people have been surprised to discover how much real estate risk can exist in an investing category that some viewed as practically risk-free.

Both commercial and residential real estate investment are key pieces of financial strategies for individuals and companies of all sizes. Property owners have a wide variety of goals in their real estate ownership. Depending on each situation, the primary goal could include tax benefits, capital appreciation, income and a place to live or to support a business. Risk plays a different role depending on which investment goal is the primary one, but real estate risks should never be treated as a secondary issue.

Real estate ownership by small businesses can illustrate how both financial goals and risks should be evaluated at an early stage. Many small business owners have purchased real estate for their company. This is considered to be commercial real estate no matter how small the company or building involved. In addition to buying commercial property, an early choice to consider is whether it is financially feasible to rent instead of buy. To the extent that owning real estate is viewed as an undesirable risk to assume, commercial property rental becomes more of a priority.

Many individuals and small business owners probably assume that obtaining a real estate loan is an automatic step in their process to buy real estate. However, the financial capability to use less debt rather than more debt should be an integral part of the decision to invest or not. Many of the real estate risk factors are decreased by reducing debt. For example, banks frequently insist on the right to review a commercial mortgage annually, and bank financing can be cancelled with a minimal amount of notice if all loan requirements are not met on an ongoing basis. This is tantamount to applying for new business financing each year, and it does add a significant risk factor that most commercial borrowers are totally unaware of until it happens to them.

Prudent real estate risk management should at a minimum involve identifying the potential risks and then taking practical steps to either avoid or eliminate the problems. As noted above, real estate is not a risk-free investment. However, knowing what the risks are and accepting them anyway is totally different than being blindsided later by a risk that was not realized at an early stage. In the small business mortgage example above, a commercial borrower could view it as a risk surprise if the bank suddenly cancels their commercial real estate financing. By reading the financial fine print and thoroughly reviewing the loan agreement before finalizing it, the risk would be exposed and then perhaps eliminated by negotiating the removal of this onerous requirement. In fact, a realistic negotiation strategy is advisable as a routine component of both real estate investment and investing risk management.

by: Stephen Bush

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