Investment Risks in Real Estate

Let’s assume you have decided to invest in real estate. The market is down, which makes it a great buying opportunity. So, what are the investment risks in real estate?

Real estate has been a wealth builder for years. Yes, the market is currently a bit of a mess, but it will bounce back. Our population continues to grow and that means people will need someplace to live. This basic calculation is simple, but true.

Investing in real estate is one way to make a lot of money. Now is the time to seriously consider doing so. When the media and general public have a gloomy view, contrarian thinking says it is time to buy. Any property you buy today is going to produce a nice return in the next three years.

Before rushing out to shop for a home, it is vital to remember that there are investment risks in real estate. These risks can be limited, but not eliminated. They include everything from property defect issues to problems arising from tenants you put in the property.

Is there any way to limit these risks? Yes! Smart real estate investors always use limited liability companies to buy rental properties. Why? Well, there are a number of reasons.

First, an LLC provides you with a shield against personal liability from lawsuits. If a tenant sues you for something and wins, the LLC blocks them from going after your personal home, bank accounts and the like.

The second reason to use an LLC has to do with financing. When you need to refinance the property or do anything involving the financing, lenders will require you to pull the property out of the company. If you are using a corporation, this will be a taxable event and you will be responsible for paying capital gains. With an LLC, this is not the case. You can move the entity in and out of the company as needed.

As you get more serious about investing in real estate, you should give serious consideration to the subject of protecting yourself. Savvy real estate investors will actually form a separate LLC for each property they buy.

Why go through this extra expense? The idea is to isolate the risk associated with each property. If you have a problem with one property and get sued, you do not want all your other properties subject to the lawsuit. By dividing them up into their own company, you can avoid this. The paperwork involved in an LLC is very minor, so it isn’t much of a problem at all.

Smart investing in property has always been the road to wealth. The trick is to recognize there are investment risks in real estate and plan for them. The limited liability company is definitely one way to do it.