INVESTING IS RISKIER WHEN YOU DON’T UNDERSTAND IT
Ask any successful money manager or individual who has accumulated a significant amount of wealth. They typically stick to things they understand to grow their capital. Warren Buffett, the renowned investor, once stated, “Risk comes from not knowing what you’re doing.” That advice rings true in real estate investing, building a business, or investing in stocks. Real estate has developed a reputation for being a sound investment strategy that offers steady appreciation and passive income.
In fact, real estate has ranked as the top investment pick in the US for the past decade. In 2023, 34% of Americans said real estate is the best long-term investment. This was according to Gallup’s annual Economy and Personal Finance survey. [1] However, just like any other investment, real estate comes with its share of risks. Investors need to understand both the risks and the benefits to make informed investment decisions accordingly.
Here are some risks associated with real estate investing and why you should be careful before buying an investment property or investing with others.
WHY IS REAL ESTATE INVESTING RISKY?
Real estate investing carries inherent risks. For many investors, the biggest concern surrounding real estate is market fluctuations. The real estate market is subject to cyclical changes influenced by economic conditions, interest rates, supply and demand dynamics, government policies, and unforeseen events.
Before the 2008 Great Recession, many investors mistakenly believed that the real estate market could only increase in value. However, while real estate values tend to rise over time, the market is volatile. An investment property can depreciate. [1]
Market fluctuations can significantly impact property values, rental income, and your return on investment (ROI). During periods of economic downturn, property values may plummet, vacancies may increase, and rental rates may decline, leading to reduced cash flow and potential losses for investors.
LIQUIDITY RISK
Real estate is not a highly liquid asset. Unlike stocks or bonds that can be readily sold on the market, real estate typically requires a more extended timeframe to sell and convert it into cash if you ever need it. Meanwhile, stocks can easily be sold if you need money or just want to cash out. In times of economic downturn or market instability, finding a buyer willing to pay the desired price can be challenging. Selling the property will depend on its condition, location, and other factors, such as market conditions and the state of the economy.
This means if an investor wants to convert their property into cash by selling it, they have to be prepared for prolonged holding periods. You may even have to sell it at a reduced price if you need the funds urgently. This lack of liquidity can be problematic, compromising your financial flexibility. While there isn’t much investors can do to lower this risk, it is possible to tap into the property’s equity if cash is needed. They can take out a home equity loan for residential properties or do a cash-out refinance. There is the option of taking out a commercial equity loan for commercial properties. [1]
MAINTENANCE AND MANAGEMENT
Property management is a challenge that investors must overcome when getting into real estate investing.
Owning real estate requires ongoing maintenance and management, which can be costly and time-consuming. Unexpected repairs, resident vacancies, and property management issues can eat into potential profits and increase investment risk. Read the article “Purchasing & Running an Apartment Complex” to learn more.
There may be times when your property experiences unexpected maintenance issues like a leaky roof or a broken water heater. The replacement and repair costs may prove to be substantial. They can even wipe out your cash reserves. [2]
Aside from these issues eroding your profit margins, you also have to worry about managing the property. This demands time and resources.
If you don’t have experience being a landlord, this could prove to be tricky. Problematic residents and high vacancy rates can compound the risks associated with real estate investing, making proactive management essential to mitigate potential losses.
To avoid costly repairs, ensure the property goes through a thorough inspection before purchasing it. [2]
As for property management, a single-family property may be easier to manage, but a multifamily property will have the cash flow to justify hiring a property management company that will handle the daily operations of your investment.
HIGH VACANCY RATES
Speaking of high vacancy rates, they are one of the most significant risks of real estate investing. Vacancies directly impact rental income, potentially leading to revenue shortfalls and financial strain.
Whether you own an office building, a condominium, an apartment community, or a single-family home, you must fill those units with residents to generate rental income. [1]
Aside from economic downturns, oversupply in the market and local issues can increase vacancies. Not only does this result in lost income, but it also incurs ongoing expenses such as maintenance costs and property taxes even while the property is not generating cash flow.
This is especially risky if you are relying on rental income to pay for the property’s mortgage, maintenance, property taxes, insurance, etc. [1]
Investors must carefully assess market conditions and property demand to mitigate the risk of high vacancy rates. Buying an investment property in a good location is one way to mitigate this risk. [1]
LOCATION PROBLEMS
Your property’s location is the most important deciding factor in your investment. You can renovate and change the property, but you cannot change its location. It will always be your first consideration when buying an investment property. [1]
Location is the ultimate factor that determines the property’s ability to make a profit. A prime location can significantly enhance property value and rental income, but a poor location can lead to stagnation or depreciation.
A property is well-located if it has easy access to amenities such as schools, transportation hubs, restaurants, malls, parks, etc. If a community or city is undergoing economic development, this is a good sign as it can affect property demand and resale value.
This means that thorough market research and due diligence are essential to mitigate the risks associated with choosing a poorly located investment property.
TIME COMMITMENT
Because of the demands of managing a property, investors should know that real estate will take up much of their time.
Before an investor owns a property, they must invest significant time doing their due diligence and learning about various neighborhoods and prospective investments. They must identify potential problems in each neighborhood and recognize if they are worth investing in. [2]
Once they have chosen a property, investors must dedicate time and effort to property management and maintenance.
Managing properties entails numerous responsibilities, including resident screening, property maintenance, addressing legal issues, and handling financial matters. These tasks require substantial time and effort, especially for those who are actively involved in day-to-day operations.
Unexpected emergencies or resident disputes can happen at times, further stretching the required time investment. Active investors should be prepared to tackle these issues at any given moment. For those who do not have the time or energy to deal with these problems, a third-party property management company may be helpful.
NATURAL DISASTERS AND ENVIRONMENTAL RISKS
Several benefits arise from the fact that real estate properties are tangible assets. However, it is also vulnerable to natural disasters like hurricanes, earthquakes, floods, and wildfires. Properties situated in disaster-prone areas face heightened vulnerability to these dangerous events. [3]
Environmental issues, such as pollution or contamination, can also impact property values and pose legal liabilities for investors. Catastrophic events can result in structural damage and substantial financial losses. These are all examples of direct risks.
However, there are also indirect risks to keep in mind. For example, when a disaster occurs, hotels may be unable to accommodate guests. In some cases, people may even be forced to move. [3]
Investors must carefully assess if a property is significantly exposed to these problems.
ALTERNATIVE INVESTING FOR ACCREDITED INVESTORS: MULTIFAMILY SYNDICATION
While real estate investing can offer attractive returns, investors should carefully assess these risks to make informed investment decisions. By familiarizing yourself with the potential risks, you can implement risk mitigation strategies like thorough due diligence, proper insurance coverage, diversification of investments, and working with financial experts.
If you are an accredited investor, you will be pleased to know that there is an alternative real estate investment that solves some of the biggest problems in real estate investing. If you want to learn how to become an accredited investor, click this link.
Real estate syndication involves multiple investors pooling their financial resources to purchase a single real estate property or portfolio. Because multifamily properties such as condominiums and apartment communities are known for their strong and consistent cash flow, multifamily syndication is the most popular version of this investment strategy. [4]
Because multiple investors are pooling their funds together, it makes these larger properties more accessible to investors. You don’t have to worry about the entire property, as you only have to provide a share of the capital needed to acquire it.
Multifamily properties are typically larger and more expensive, making them more difficult for individual investors to purchase. But through multifamily syndication, you can overcome this high entry barrier. It is also much less risky than purchasing a large multifamily property on your own. [4]
In a syndication deal, a syndicator serves as the general partner (GP), taking on all the responsibilities in the investment. Also known as the sponsor, the syndicator will handle everything from locating the investment property to creating and executing the business plan. They will also look for real estate investors participating in the syndication deal.
As limited partners (LPs), investors provide a portion of the capital needed to purchase the multifamily property. They may also pay specific fees associated with the investment property. However, they have no responsibilities or liabilities beyond that. This means multifamily syndication is a highly passive investment in real estate. [4]
As you may know, real estate investing can be a good source of passive income. However, it typically requires a significant time investment, primarily due to property management.
Through real estate syndication, you don’t even have to worry about property management since the syndicator will also be the one to handle it. Some syndicators hire property managers to cover the day-to-day operations of the investment property, but others have the expertise to handle it themselves. Either way, it is not the responsibility of the investors.
For their investment, LPs can earn a portion of the property’s monthly rental income. You can just sit back, relax, and enjoy your investment. This rental income will be distributed on a monthly or quarterly basis, depending on the deal structure. [4]
Every deal is different, but investors may earn a share of the equity upon resale. The specific details of the profit split should be found in the private placement memorandum (PPM) or the syndication agreement. Investors must perform due diligence and learn how the syndication deal works before participating.
Investors should remember that most of these syndication deals are exclusive to accredited investors, meaning those who fit the financial and professional criteria set by the US Securities and Exchange Commission (SEC).
CONNECT WITH AN INSTITUTIONAL REAL ESTATE OWNER/OPERATOR
Like other real estate investments, multifamily syndication is still subject to illiquidity because these deals tend to last for years. However, accredited investors are more comfortable with not having access to their funds because of their high net worth and income.
Still, working with a syndicator you trust is important because, as this is a passive investment, they will make all the decisions regarding the investment property.
BAM Capital partners with accredited investors who want to enjoy passive income and all the other benefits of multifamily private placement. As the private equity arm of The BAM Companies, BAM Capital has been focusing on buying assets targeted as having strong profitability potential and staying disciplined in its investment thesis. BAM Capital’s investment strategy aims to create forced appreciation while mitigating investor risk. To date, the brand has successfully managed over $1.7 billion in assets across ~9,000 apartment units.
Remember that no investment is without risk. Before making financial decisions, consult your investment advisor and schedule a call with a BAM Capital investment team member.
For additional multifamily real estate insights, visit Pathways to Passive Wealth, BAM Capital’s new platform designed to make real estate investing more accessible, transparent, and achievable for aspiring and experienced investors.
Disclaimer: All investments carry risk, including potential loss of capital. This content is for informational purposes only and is not financial, legal, or investment advice, nor an offer or solicitation to buy or sell any security. Consult an independent advisor for personalized guidance and contact BAM Capital for details on current offerings. BAM Capital and its representatives are not fiduciaries or investment advisors. The information provided is general and may not reflect individual financial goals. Any financial terms, projections, or forward-looking statements contained herein are hypothetical in nature and should not be interpreted as guarantees of future performance or safety. Such statements reflect BAM Capital’s opinion and are subject to market fluctuations, economic conditions, and investment risks. Past performance does not predict future results. BAM Capital and its affiliates do not guarantee the accuracy or completeness of this information. BAM Capital offers investment opportunities under Rule 506(c) of Regulation D exclusively for accredited investors as defined by the SEC. Verification of accredited investor status is required prior to participating in any investment.
© 2025 BAM Capital. All rights reserved.
SOURCES:
[1]: Investopedia. (2024). “Is Real Estate Investing Safe?” https://www.investopedia.com/articles/investing/122415/why-real-estate-risky-investment.asp#
[2]: AccountingTools. (2024). “Pros and cons of real estate investing.” https://www.accountingtools.com/articles/pros-and-cons-of-real-estate-investing
[3]: APG.nl. (2021). “How do environmental disasters impact real estate investments?” https://apg.nl/en/publication/how-do-environmental-disasters-impact-real-estate-investments/
[4]: Multifamily Refinance. (n.d.). “Apartment investing.” https://www.multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important
[5]: BAM Capital. (n.d.). “Finding Opportunity in Any Environment.” https://capital.thebamcompanies.com/
