Did you know there are three types of real estate deals you should avoid if you have low risk tolerance? This guide explains.
3 Types of Real Estate Deals to Avoid if You Have Low Risk Tolerance
When it comes to investing in real estate, some people have lower risk tolerance than others do. And that’s completely fine – as long as you know what types of deals to avoid if you have low risk tolerance. These are three of the worst offenders:
- Investments in overbuilt markets
- Investments in declining markets
- Deals in areas where there may be government overreach
Here’s a closer look at each.
#1. Investments in Overbuilt Markets
Overbuilt markets are those that are full to the brim with empty real estate investments. There’s not much use in investing where. However, some people choose to make these types of investments because they believe over time, it’ll pay off. But if you have a low risk tolerance, or if you can’t wait for profits to start coming through, these are not the right real estate investments for you.
#2. Investments in Declining Markets
It can be tough to tell when a market is in decline, particularly early in the process. However, there are several signs that show a real estate market is becoming less desirable. Some of those signs include business closures, poor school ratings, and several vacant homes. If you notice any of those signs after watching an area for several months, it may be in your best interest to avoid making an investment there.
Related: What is forced appreciation?
#3. Deals in Areas Where There May Be Government Overreach
Though everyone has their own definition of government overreach, it’s important that you know local laws, regulations and court rulings can impact the profits you’re able to make as a real estate investor. For example, some localities have rules on rent control and other aspects of landlord-tenant relationships. If an area appears to be unfriendly toward landlords, an investment there may not pay off the way you hope it will.
How Can You Keep Track of Good Investment Areas?
Working with a skilled real estate agent who focuses primarily on helping investors is the best way to keep track of good investment areas. It’s also the best way to get a heads up on great deals that are about to hit the market. As an investor, you should maintain a close relationship with a highly qualified real estate agent who works in the areas where you want to make investments.
What About Using Your Instinct?
One of the best ways to avoid investments that won’t pay off is to listen to your gut. If something doesn’t seem right, or if you’re questioning the profitability of an investment for any reason, take a long, hard look at what could happen. Your instinct may be far more valuable than any market report or other data could be. And if you’re questioning yourself, talk to your real estate agent; her experience can help guide you.
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