What Are the Risks of Real Estate Fund Investing?
While real estate fund investing is risk-adjusted and optimized to alleviate market pressure, it's essential to understand that all investment types carry an inherent possibility of risk.
From human-made errors caused by mismanagement to reactionary market conditions, having a handle on the possible downsides can help you become a more informed and confident investor saving you problems and financial panic down the road!
In this blog, we examine the risks of investing in a real estate fund, how you can become more aware of these potential downfalls, and a case study of how Viking Capital manages and mitigates risk volatility through multifamily assets for investors.
What Is the Worst Case Scenario?
Let's be honest: there is a risk when investing in multifamily properties. In the extreme, or what we may call the "worst-case scenario," an investor could lose all of their investment dollars if they invest in multifamily real estate.
However, even with fluctuations in the price of real estate, inflation, and changes in the housing markets, it's highly uncommon for multifamily investors to lose their entire investment. That's because, as an asset class, multifamily real estate proves to be a safer and more scalable option over the long term than almost all other asset classes.
Because of this, the worst-case scenario generally comes down to poor leadership in the form of inexperience, negligence, or mismanagement of the funds or assets by the management team.
As Warren Buffet once said, "risk comes from not knowing what you're doing."
What Contributes to Risk?
Consequently, to mitigate the risks, we must examine the contributing factors that add to a risk level in a multifamily real estate deal.
To assist investors in better understanding the risks involved in a real estate deal and explore the questions "what is a real estate fund" and "is it a safe investment," let's examine what could contribute to something going wrong.
Although multifamily real estate has consistently proved an attractive, profitable, and safe investment, this does not mean it may do so in the future.
Thanks to SEC rule 156, which prohibits investment institutions from making false or misleading statements, the following disclaimer has become prominent: past performance is not indicative of future results.
This means every investment opportunity must be weighed on its merits and not how it performed in previous years.
When choosing a multifamily investing strategy, asset, or fund, it's crucial to examine the strength of the management team, overall investment strategy, cash flow, equity, liquidity, payout structure, and more.
In addition, a personal assessment of the amount of risk and potential losses you are willing to take on is recommended and a fundamental step in the pre-investment analysis.
Properties, Markets, and Projections
Investing in multifamily properties through a real estate investment fund means not only investing in the properties themselves. You're also 'investing' in the fund or asset managers tasked with a full range of duties, including selecting the properties, managing the properties, marketing the properties, and so on.
Inexperienced fund managers may purchase properties in poor locations because the 'price is right.' However, location is a critical factor in the profitability of a real estate investment. As a result, these investments might yield lower rental incomes and see minimal appreciation throughout the fund leading to poor performance.
In addition, inexperienced fund managers may also purchase properties from lower classifications requiring extensive and costly upgrades. This is known as an 'asset-level' risk—and if not managed correctly, it could become a 'white elephant,' or an asset that is so costly to maintain that it provides little to no value to the investor.
Finally, the wrong asset managers may not set the correct parameters when choosing investment properties and make incorrect predictions regarding the prospects of an investment fund.
To give you an idea of what to look for when choosing real estate funds with good projections, the Viking Capital considers factors such as demographics, positive net migration, and strong job markets (amongst others) when making projections on our assets.
The Unpredictability of the Market
As you probably already know, the real estate market can be dynamic and even, at times, unpredictable. One of the most transparent cases was the 2008 financial market crash caused by excessive leveraging, the overconfidence of financial institutions, and risk.
Although this was a "black swan event" due to its unforeseeability and irregularity, it is essential to understand that massive shifts in the housing market are possible (if unlikely).
A Case Study in Mitigating Risk: The Viking Wealth Fund
So with all of these risks, is real estate fund investing still worth it? As we've examined, no investment strategy is risk-free; however, investing through multifamily properties consistently remains one of the lowest-risk strategies for real estate investors.
Mitigating risk starts with the investment team. With the experts and structure of Viking Capital, we've established an experienced team to keep your money safe and deliver it back to you with excellent returns.
How We Manage Volatility
To offset market volatility, Viking Capital purchases projects in different markets throughout the year.
This allows us to navigate the level of exposure to different parts of the volatility across the year, helping us stay on top of the cycles and minimizing huge fluctuations.
By focusing on class A and B real estate investments, we're able to secure good tenants, thereby creating a more robust cash flow while offsetting any future dips in occupancy rates in a volatile market.
We Also Navigate Debt and Inflation
Much like market volatility, debt and inflation are market forces that can only be controlled up to a certain level.
In a high inflation environment, everything becomes more expensive, including costs for capital expenditures. At the same time, inflation also causes the demand for a rental property to go up, meaning it's one of the few investments that can perform well in an inflationary environment.
In the case of debt, Viking Capital finds better deals for real estate assets by creating a list for consideration, allowing us to make an informed decision. In addition, we rely on expert insight to time the purchasing of new investments for optimal returns.
For example, if our forecasts show that costs will come down in a few months, we will delay the purchase of that new asset to maximize investor value while also saving costs.
Real Estate Fund Investing Is the Safest Option to Build Generational Wealth
While all investment types carry risks, choosing a multifamily real estate fund is a low-risk way to ensure your investment is as safe as possible. When backed by an accomplished team experienced in fund and asset management, many risks can be mitigated or eliminated.
If you'd like to learn more about Viking Capital and how we reduce the risk in our fund portfolio, reach out to our team! We can guide you through our asset selection and management process to ease any concerns you have about the risks of investing in multifamily real estate properties.
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