Question

While investing in some Real Estate can be very profitable, the recent housing crisis had a huge impact on the entire U.S. economy. How can investing in real estate be problematic? please be detailed.

Answer 1

The housing crisis of 2007-2008 which in turn had a huge impact on the US economy was a result of culmination of de regulation and poor timing followed by fed in rising or decreasing interest rates.Investing in real estate comes with the following risks:Investments in real estate run the risk of depreciation,even though the properties are purchased with the hope of them appreciating there is a chance they depreciate resulting in a loss for the investor.Another issue is the eventuality of a net negative cash flow for the investor.If the mortgage payments and taxes are higher than the income generated from the asset that would result in a net negative cash flow.Another issue with investing in real estate is liquidity,once a purchase/investment is made in terms of an asset in real estate ,it results in the money being tied up to the property and this is money that cannot be easily converted to cash and thereby resulting in a lack of liquidity.A real estate investor also runs the risk of foreclosure if he /she fails make the mortgage payments.A real estate investor is subject to the risk of high vacancy rate which would result in a lack of or fall in rental revenue which would in turn adversely impact the investor's ability to make mortgage payments on the property.Another risk an investor in real estate is subjected to is that of location.Location can drive up the price of properties and rive own their value.Investments made in locations with high crime rate and poor growth in population may result in losses for the investor as buyers or tenants maybe hesitant to purchase or rent the property.Ultimately the real estate market is heavily influenced by the state of the economy,purchases made when prices are high due to a high demand may not yield a good return when sold when the due to changes in economy or a fall in demand.