Capital Risk – Residential real estate investing has many risks, and a significant proportion of investors experience financial losses. According to recent findings from Clever Real Estate, 90% of residential real estate investors have reported losing money on at least one investment. If you follow the many real estate moguls, this stat may sound unbelievable. But my personal experience with real estate investments leads me to believe that this finding is plausible.
Which term refers to the possibility of an investor losing some or all of an investment?
The possibility of losing all or a portion of an investment is known as capital risk. It covers the entire spectrum of assets for which a complete return of initial investment is not guaranteed.
When investing in stocks, non-government bonds, real estate, commodities, and other alternative assets, investors run the danger of experiencing capital loss, which is often referred to as market risk. A business that invests in a project also assumes the risk that the endeavor won’t yield enough future profits to repay the capital used.
Key Residential Real Estate Investment Statistics: Capital Risk
Overall Losses: 90% of investors have lost money on a residential real estate investment.
Significant Losses: More than half (52%) of these investors have lost $100,000 or more on a single investment.
Severe Financial Impact: Nearly half (42%) have lost more money than they have made from their real estate investments.
Extreme Cases: 42% have lost $200,000 or more on a single investment, and 45% admit that a bad investment has almost ruined them financially.
Common Real Estate Investment Issues Leading to Losses: Capital Risk and Capital Loss
Bad Tenants: 51% of investors have dealt with bad tenants, and 52% have faced severe property damage caused by tenants. This is the result of the capital risk associated with real estate investing.
Frequent Maintenance and Repairs: About 41% of rental owners deal with maintenance issues, and 40% handle repairs at least once a week.
Evictions and Missed Payments: 56% of respondents have had to evict a tenant, and 61% track down missed rent payments monthly.
Regrets and Stress: A significant 87% of residential rental investors have regrets about their investments, and 40% wish they had never started investing in residential real estate.
A few thoughts consider on residential real estate investments.
It is estimated that 92% of all real estate investors own only one or two properties, which often includes their first home that they decide to rent out. Leveraging your initial home or inherited property to kick off your real estate investment is something that I see a lot. There are potential issues to consider. One issue to consider, the property may have been a home that was not acquired with the intent to become a rental income property or an price appreciation play. Another issue to consider is that one or two units exposes you to concentration risk and you don’t get economies of scale. The small investors may not realize how much risk they are taking on with real estate investments and they also may not realize how beneficial it is to have a good team to provide good advice and services.
Concentration risk refers to the potential for financial loss due to overexposure to a single counterparty, sector, geographic region, or risk factor within a portfolio. This lack of diversification makes the portfolio more susceptible to market fluctuations and economic downturns. To manage real estate concentration risk, you might acquire properties in different markets, locations, and property types. You regularly review the portfolio and rebalance so a single investment doesn’t dominate your results. You can stress your portfolio with different scenarios help identify and address risk. Real estate investors can maintain a more stable financial position when they understand their concentration risk and take steps to mitigate the risk.
Scaling your real estate portfolio to more than one or two properties can offer significant benefits. You can take advantage of economies of scale, diversification, and increased opportunities. With multiple properties, you can spread your risk across different locations and property types. The diversified cash flow from multiple rentals can provide a more stable income stream. Owning multiple properties gives you more leverage when negotiating with vendors, contractors, lenders, and property managers, which result in better rates and services. With a larger portfolio you can employ more sophisticated tax strategies, better legal protections, better insurance coverage, and more leads on investment opportunities.
The recent stats published by Clever Real Estate got me to put some of my thoughts down on how to avoid becoming another real estate investment statistic. There are other risks to consider such as identifying and retaining good tenants which I will discuss in future posts.