Real Estate News, Reviews and Investment
Article: how to assess the risk versus return with real-estate investment.
Any investment can lose money, whether in the stock market, in real estate or even in a standard savings account. The chance that this will happen is the risk while the profit the investment may make is the return.
A successful investor will need to weigh the probable risks and possible returns when investing in a new venture. Generally, any investment that offers high returns at a low risk will usually be a better bet than one that has high risks and low returns.
While risks will vary, more information makes it easier to assess whether the risks are the right ones for you. For example, if you’re a trained electrician you may be happy taking on a property with faulty wiring where other investors might not.
Assess the risks
Although it is well worth consulting experts along the way, ultimately the decision of whether to invest in a property is down to you. Here are a few things to consider:
How to reduce risk
It is often possible to reduce the cost to you of certain risks, although this can be expensive in some cases.
There may be other ways you can reduce risks, such as fire alarms and flood defenses. While some will be essential others may not be necessary and any expenses you incur will lower the profits of your investment.
The money you make on an investment is what makes the investment worthwhile. A good return will allow you to make further improvements to a property, go on vacation or possibly move your retirement forward a year or two.
However, it isn’t always easy to predict whether a particular investment will give a good rate of return or not. As with assessing risk, it’s best to be informed: you may uncover information that shows the investment isn’t the right one for you.
The returns on an investment are usually indicated as a percentage and are calculated as follows:
(profit) / (initial investment) x 100 = (returns %)
For example, an investment of US$100,000 with an income of US$2,500 at the end of the year has a rate of return of 2.5% per year.
When investing in real estate, returns are usually a combination of rental income and capital gains (any rent paid and any profit made when the land is sold).
What can affect returns?
Many factors may increase or decrease an investor’s profits. If we consider a rental property, these may include:
Is this a good rate of return?
A rate of return is a good one if it’s better than other investment opportunities available to you. Some basic measures for comparison are: