Macroeconomic/Market and Asset Risk
For commercial real estate and investments, you have to be careful and consider everything in terms of the current and future economic conditions. You also have to know how they can or will affect the real estate market in the area that you are thinking of investing. To be sure that you are limiting the overall economic and market risk, it would be a good idea to diversity your investments.
Regarding asset risk, you will need to look at the microeconomic effects, as well as the macro depending on the type of asset you have or are looking to invest in. For this risk management, you should look into investing in multiple types of assets. But if you are wanting one specific asset then make sure to invest in contrasting markets.
Liquidity Risk
It is always best to make sure that the places that you invest in have good liquidity, because if it’s in an area of town that has a track record for selling poorly, then you might want to look elsewhere. If you have already invested in an area that does have this pattern of sales record, make sure you to plan an exit strategy ahead of time in case things start going south.
Credit Risk
As with any investment in real estate in terms of leasing out to a tenant or tenants, there will always be a credit risk. Mainly because of the fact that their situation financially, and etc. could be anything. To lessen this risk, make sure to completely evaluate the tenants’ backgrounds in general and specifically, financially.
Debt Risk
With debt, the more there is, the more risk there is because of the fact that it will be harder to make payments if there is an overwhelming amount of debt. The best way to manage this risk is to not put yourself in debt. If you absolutely need to, make sure not to go over 75% of the property’s worth.
Property Specific Risk
When looking at certain properties, make sure to evaluate everything about that property before making any decisions. So, when it was built, it’s repair history, the areas history of natural disasters or extreme weather of any kind, etc. Also be sure to think about the future in terms of the surrounding area. This just means that if there are any big empty spaces surrounding the property that could be used for big buildings that might block the property’s view of something valuable, then the property might not be such a good investment after all.
Physically Obsolescence Risk
When a property has been at a certain place for a long time, the effects of the economic trends are likely to persuade you to either remodel, replace, or move. This is because over time, things begin to wear and tear, and it’s likely not as fresh looking as it was when you first invested in it.
Financial Risk
Lastly, when looking through all the facts, history, and everything else about the property that you’re looking to invest in, make sure to also include some time to look at the Capital Stack of that property. To lessen the risk of Capital Stack in general, try to pick a property with less equity holder’s in front of you whether that be senior debt or just common equity holders.
