UGANDA, Kampala | Real Muloodi News | Real estate is one of the most lucrative investments in Uganda and the world over. It’s not surprising that many people have bought and sold commercial and residential properties. Some of the most wealthy individuals in Uganda are real estate investors. However, real estate is not without risks.
Below, we discuss some risks involved in real estate.
Liquidity Risk
Liquidity refers to the ease with which an asset can be converted into ready cash without affecting its market price. It is the ability of a firm, company, or individual to acquire cash without suffering catastrophic losses. Conversely, liquidity risk stems from the lack of marketability of an investment and the inability to sell quickly enough and prevent or minimise losses.
With real estate, liquidity risk is how quickly and easily one can sell off a real estate property. Real estate has a high liquidity risk compared to stocks or bonds. While investors can sell stocks within days, it can take a month or longer to get cash out or sell real estate investments.
Leverage Risk
Leverage is one of the many ways one can invest in real estate. It essentially means using borrowed money to buy a property. When leveraging, you borrow money and purchase a property instead of covering the total price upfront – think bank mortgages. Being able to leverage the capital in a property is one of the significant reasons investing in real estate is so attractive.
One of the significant risks of leveraging is foreclosing. Should an investor default on their loan, they risk their entire investment. Sometimes the lender will seek payment from the investor for the balance owed after the foreclosure proceeding.
Another leverage risk is being vulnerable to the market. If prices fall, the value of your real estate investment could end up being less than the amount you bought it for.
As a rule of thumb, you should not leverage over 75% of the property value. For example, if the property costs Ugx1,000,000, you should not borrow more than Ugx750,000.
Credit Risk
This is especially true for commercial properties. If tenants default on rental payments, it means you are going to be short on cash flow.
In a worst-case scenario, where the tenant cannot pay what they owe you, you are faced with additional costs, not to mention the expenses involved in finding a new tenant.
Market Risk
Market fluctuations can trigger a disparity between the supply and demand of property. This means you can end up getting much lower returns on your investment than initially estimated. Inflation, unemployment, interest rates, and unexpected factors like the impacts of COVID-19 can trigger these market risks.
Regulations Risk
Changes in laws and regulations can affect the real estate market. Changes like increasing tax rates can undoubtedly affect property income and tenants’ cash flow, affecting your real estate investment returns.
Idiosyncratic Risk
This is risk specific to particular properties, as every project is different, and all are prone to unique risks depending on the property’s location, age, or condition.
For example, a high rise property with magnificent views might face a considerable drop in demand if a taller building is constructed next to it and obstructs those views. It may force the owner to reduce the price to increase demand.
Just like any other investment, real estate is not without risk. However, the real estate market has stood the test of time, and many people can testify to the potential of wealth one can accrue by investing in real estate. Diligent and intelligent investors must consider all risks before deploying funds to a project.
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