How to Quantify and Integrate Real Estate Risk Into Portfolio Planning
Real estate has long been viewed as an inflation-resistant asset class, but like all investments, it carries risk, and sometimes in less obvious forms than equities or bonds. For advisors helping clients incorporate real estate into broader wealth strategies, understanding and quantifying these risks can be an important step in developing a more complete picture of the client’s overall financial situation.
Real Estate Investment Risk: What You Need To Consider
Investing in real estate has long been recognized as a means to build wealth and generate a steady income — and for many investors, real estate properties are the main assets in their portfolios. However, this doesn’t mean that real estate doesn’t have any risks. In fact, there are several types of risks associated with this industry. Understanding each of these challenges is critical to ensure protection for your capital, increase the potential for high returns, and decrease the chance of loss.
What Is the 10% Rule in Real Estate Investing?
The 10% rule actually consists of three rules. They are meant to be a quick and minimal way for real estate investors to check that they are getting a good deal on their investment. Having some simple-to-follow rules in your back pocket is always a helpful tactic to eliminate potential bad deals early on and with little effort.
How Banks Manage Liquidity Risk
Banks, like businesses and individual investors, face the challenge of liquidity risk. The principle of managing liquidity risk for banks involves ensuring that cash inflow, or income, is timed appropriately to meet upcoming financial obligations. Banks employ a range of strategies to ensure adequate liquidity, including maintaining reserves with the central bank, borrowing on the interbank market, leveraging intra-group borrowing, or investing in readily marketable assets like government bonds.
What Is the Rule of 69 Percent In Real Estate Investing?
Investors love to use rules to help them predict outcomes. For example, there is a one-percent rule (a one-percent increase in interest rates equates to ten percent less you can borrow to keep the same payment), a two-percent rule (the percentage of a home’s cost that you should be asking for in monthly rent), and more. Some of these rules can help estimate potential results, but others are outdated or possibly never really held much value.
What Is the 2% Rule in Real Estate Investing?
Unlike some other famous maxims in real estate investing (like the seventy percent rule, for example), the two percent rule is widely discredited in most U.S. metropolitan areas. The rule holds that the rental amount should equal two percent of the property's purchase price. By that calculation, if you purchase a house for $100,000, the monthly rent should be $2,000. That seems unrealistic at first glance and becomes even less likely the deeper you dig in.
