Managing the risk associated with investing in real estate is the key to protecting yourself from loss. The most important aspect of risk management in real estate is to know the law. It’s essential that you have a working knowledge of the real estate legal structure and requirements. Here are some tips to manage your exposure
After you’ve researched property availability, cost, and buyer interest, you’ll need to hypothesize about what the future holds for your market. Will prices go up or down?
When considering your risk, keep the following points in mind:
- Think about the local economy. Are there jobs available or are most companies in the area losing jobs? Are new homes being built more or less than over the past 5 years?
- Make wise financing choices. When picking your funding source, think about how long you plan to keep the property. Adjustable Rate Mortgages (ARMs) are attractive because of their lower down payments and lower rates. You can pick the duration of the loan – typically either 1,5, or 7-year ARMs – and your rate will be adjusted to the prevailing rates after this period of time. If you plan to hold onto a property longer than the ARM, ARMs can cost you more because of the higher interest rates. It may be more prudent to opt for a fixed-rate mortgage with the shortest length you can handle financially.
- Pay a large down payment to reduce your risk. If you can put down 25%, you’ll have instant equity in the property, and most likely get a better interest rate.
- Be creative with your mortgage payments. Make larger monthly payments then require, or make one extra payment a year you’ll reduce your principle.
Know the Real Estate Law
Every part of real estate involves the law. There are many complicated legal pieces and many different people are involved in any real estate transaction.
First and foremost, the contract is the most important part of buying and selling property. The primary purpose of a contract is to show mutual assent – the agreement by both parties to the exchange- in writing. Verbal agreements are not binding. To be valid a contract, it must include the following:
• Identification of the parties involved and the agreed-upon price
• Specific “consideration” must be stated – something of value that’s being exchanged, usually money
• Signatures of each party involved
There are checks-and-balances to protect people in every situation and to protect the overall system. Appraisals are used to ensure that the property is worth what the lender and seller have purported. The appraisal prevents shady deals from being stuck between investors and mortgage brokers. Commercial property has its own laws regarding use and sale. If there are tenants living in the property, there are specific laws to protect the landlord and tenants. Lenders are held to the law by how much they can loan, what documents and insurance are required, and even how they market their financing programs.
It’s important to know about tax law, or get advice from a professional since it greatly impacts your success in real estate investing. Mistakes are costly, and by protecting yourself you can make decisions that will help your bottom line rather than take away your profits.