The 5 Biggest Risks in Real Estate Investing

Is investing in real estate still worth it?

Many people are looking for ways to invest to increase their net worth and generate passive income. One of the biggest questions we’re regularly asked is about whether or not it’s a good time to invest in real estate.

In 2008, when the housing prices took a significant drop, people speculated that the bubble was bursting and it was a terrible time to invest in real estate because prices would continue to fall. In 2016 when values has nearly doubled what they were in 2008, and the government stepped in with new tax and mortgage rules to cool down the market, people thought that there was a bubble and it was a terrible time to invest because the bubble was going to burst.

Here was are now in 2020 and still no bubbles bursting. The real truth is that the trend in real estate is always upward. The other real truth is that you should be investing based on cash-flow if you want a recession-proof investment. At CREIC, we invest in real estate assuming that the market will drop and never count on speculation of the market. This is how real wealth is made.

Besides, what other type of investment will allow you to control 100% of the asset with only a 20% down payment?

That said, like any investment, real estate also has risks. By educating yourself and working with seasoned experts you can drastically minimise these risks, making real estate investing one of the least risky investment vehicles available in Canada.

Here are the top five biggest risks you could be faced with when investing in real estate and some basic strategies to mitigate these risks:

#1 Bruising your credit
Besides needing a mortgage to buy real estate, some investors will also borrow money from a line of credit for the down payment or renovations. While this may all be fine in practice, it’s important to be aware of how this may affect your credit score, which of course can also affect your ability to qualify for future mortgages. Be wary about using credit, and if you do make sure you stay on top of your payments and regularly check your credit reports.

#2 Over-spending on renovations
It’s easy to want to turn your investment property into a dream home for your tenants. However, it’s imperative that you stay within your numbers to make sure that it will still produce passive income and not go underwater (when the cost of the house/renovations/mortgage exceed the market value).

#3 Managing bad tenants
Generally speaking, the landlord-tenant laws tend to favour the tenants, so it’s important to be well-aware of these laws. Of course, it’s best to minimise these issues in the first place by carefully screening potential tenants. Credit checks can be very valuable in helping you screen. Having a solid lease agreement and carefully reviewing it with your tenants is imperative as well. CREIC members get complimentary credit checks for screening tenants as well as access to our tried-and-true lease agreements.

#4 Being sued
Being a landlord means you are responsible for any legals issues that could arise related to your property, which could include medical, personal injury, and other entitlements. As previously mentioned, a solid lease agreement can help mitigate some issues, but you will also want to consider insurance with adequate liability coverage.

#5 Losing your property
Accidents can happen and so can natural disasters and catastrophes, causing damage and destruction such as fires and flooding. Insurance will cover such disasters, but you also need consider loss of rental income, which certain policies will cover as well. Also, don’t be a slum-lord and risk having the city raze your property due to public safety concerns.

The Canadian Real Estate Investment Club is operated by seasoned, active real estate investors. Our mandate is to help new, prospective, and other seasoned investors minimise their risks and maximise their cash-flow and net worth. We believe it’s always a good time to invest in real estate because of our recession-proof investment strategies which have proven lucrative through various market scenarios over the last 15-20 years. Furthermore, the Canadian Real Estate Association (CREA) is forecasting a 7.5% increase in sales activity for 2020. What are your goals for this year?