We believe that real estate investing is a key pillar of what makes the American dream. Millions of people have made and continue to make their fortunes by investing in real estate.
We've all heard of the young real estate guru's who are raking in millions each year using a "simple strategy".
But, there are also many investment risks and disadvantages involved when buying real estate.
We'll cover several types of investment risk and disadvantages to consider before parting with your hard earned cash into real estate. Don't worry, there's a silver lining to all of these negatives.
1) Liquidity Risk
The first investment risk we'll be covering is the liquidity risk that comes with owning real estate. When buying or selling in the stock market, it's easy to sell investments if you need all of a sudden need capital.
But, when you own real estate, your investments aren't as easy to sell because of the lack of liquidity.
If you're really desperate to sell, you might have to take a loss on your investments, by selling below market, as you know, it's never good when you lose money.
There are options if you need to tap into your property's equity such as home equity loans, cash-out-refinance or even fractionalized ownership.
Essentially, the risk is that there might not be enough buyers in the market to purchase your property at the price you require, therefore you might have to sell at a lower price to make it more attractive to potential buyers.
Thankfully, investing in real estate using the Parcl protocol means liquidity isn't an issue. Our protocol utilises technology called liquidity pools which provide constant liquidity to the market by incentivising investors (liquidity providers) to provide capital in return for a small percentage of reward fees.
You can learn more about liquidity and how liquidity pools lower risk, here: What Is An AMM?
2) Lack Of Accessibility
Our biggest goal here at Parcl is to bring real estate investing to everyone. Currently, millions of people across the world are priced out of owning a home, and having exposure to the real estate market.
Investing in real estate is seen as a huge risk for millions of people due to the high financial barrier, and lack of understanding of such a complicated process. The average person has a low risk tolerance and thus makes real estate investing unattractive.
We also believe that institutions are only adding fuel to the fire. They increase this barrier significantly; buying cheap homes which are typically bought as starter homes by young families.
We're dedicated to levelling the playing field for the average person to begin gaining exposure to a multibillion dollar market.
Thankfully, we can do this by offering customized investment exposure; and removing many layers of the buying and selling process using innovative technology.
3) Long Process
On average, it can take up to 180 days to sell a property, that's six months of your life dealing with middlemen, mortgage companies, lawyers and no doubt many more individuals, just to sell a property.
That is incredibly long if you're someone that profits from flipping houses. Not to mention the process being incredibly complicated to navigate alone. These long periods also come with a ton of costs thanks to the many intermediaries involved.
Building your Parcl real estate portfolio can be done with just a few clicks. If you want to see more about our real estate protocol works in just a few clicks, check out our guide from our final testnet: Building a real estate portfolio with Parcl.
4) Time Consuming
Not only is the process of buying or selling a property time consuming and intricate; the management of your physical portfolio can be a tedious task. There are four main issues that landlords face:
- Tenants that stop paying rent
- Tenants that break their lease early
- The lack of security from not finding tenants quick enough
- Property damage
These are all common and stressful issues for modern day real estate investors, problems that they typically outsource to property managers.
But, this eats away at your profits; with the typical property manager charging 30% of the rent each month. You can find out more about these problems here: 4 Biggest Challenges of Being a Landlord.
5) Unpredictable Markets
There are many variables that will affect the state of the real estate market including:
- Supply & Demand
- The Economy
- Interest Rates
- Government Policies
- Political Events
The recent covid-19 pandemic shows how volatile the property market can be. During the first few months, we did see rental prices being slashed due to a mass exodus of city residents heading for the suburbs, in turn, property prices did decrease significantly in many areas.
Another a huge example would be the 2008 great recession, many investors believed that the real estate market was somewhat invincible and priced only ever increased.
It's safe to say that no one really can predict where the market is going go. However, one silver lining is that you can now hedge against downturns in the market using your Parcl portfolio.
Check out how you Parcl is the future of real estate investing by checking out our article: 5 Reasons Why Parcl Is The Future Of Real Estate Investing.