How to Reduce Investment Risk through Real Estate Investment

The investment risk of stock market has made real estate investment the chosen area for many investors who are looking for greater safety. Not only real estate investment poses lower investment risk, it is also highly lucrative if handled properly. You can profit from real estate investment only when you have an effective risk management plan in place.

You can reduce investment risk in real estate by firstly buying property below value. You can then increase the value of the property by doing renovations, applying for change of use or zoning and increasing rent. By purchasing below value and then increasing value you are in effect putting a cushion in place that will reduce investment risk in case the property values move downward.

You can reduce risk by buying a foreclosure or a rehabbing property for very little starting cost, invest a little more on repairing and renovating it and then sell it for a brand new and expensive house. Alternately, you could turn into a landlord and rent out your house for generating a substantial rental income.

Apart from the high yielding nature of real estate investment, you increase safety as you build equity through your loan repayment over a period of time. Capital gain over a period increases the value of your property and increases your equity to loan ratio that provides additional risk cover.  

Investing in real estate provides substantial tax breaks. You can pay back your loans with the tax refunds to increase your equity and reduce investment risk.

What is more, real estate investment allows you to use other people’s money for running your own property business. Even though banks are reluctant to give loans for stocks or gold investing because of their high investment risk, they readily give out property loans since they get something immovable and tangible in case of defaulting.

By using proper investment structures like family trusts, trading trusts, LAQC and corporations you can limit your personal liabilities in case things go wrong with your real estate investment plan.

It is possible to insure your properties of any kind of risk such as fire, earthquake, damage or theft. You can also insure the contents and chattels. There are also innovative landlord insurance policies that cover you in case of rent default or damage to the property.

Why real estate investment is a better suited to a risk management plan?

No other investment can provide a better investment risk cover than real estate. It is not possible to buy stocks or for that matter any other investment below value. Apart from real estate you cannot increase the value of any other investment through your effort.

Risk Management Plan

In real estate it is very easy to put a risk management plan in place. Even if you are new to real state investment, you can understand its basic functional aspects more quickly than other financial instrument. That is why real estate attracts the greatest number of amateur investors looking to improve bad credit records and make money.

Real estate investment is more conducive to a superior risk management plan when compared to stock market because you can cover your investment risk through various types of insurance plans. Unlike stocks where you have no control over your investment, in real estate you have total control over your investment. No Madoff can run away with your money thereby reducing your investment risk.

Property prices have risen consistently by 8% to 10% during the past 300 years. This is because world population is increasing with every passing year and we are not producing any more land. Hence, real estate investment is free from the investment risk of abrupt fluctuations that is a regular feature of the stock market.

But what qualifies real estate investment to a good risk management plan is that the prices of all the real estate properties of an area move at a time. This definitively lowers the investment risk of real estate as compared to stock where not all the stocks will move in tandem even if the market is moving. Hence, in real estate investment you do not have to rely on guesswork and uncertainty, which increases your chances of financial success.

Real estate prices tend to move slowly and steadily. Even if there is a market crash, the property prices at worst go down in value by 5% to 20%. In case of stocks the prices can fall as much by 80% to 90% or the company may go into liquidation making the value of your investment worth a whole lot of toilet paper.

Real estate prices tend to have a built in inflationary proofing as they tend to move up when there is excessive money supply. This greatly reduces the investment risk when inflation goes out of control.

Real estate investment as better suited to risk management plan when compared to stocks or any other investment instrument. In fact, real estate investment beats any other forms of investment like stocks, commodity and currency trading because of its stability of returns virtually free from the investment risk volatility.