1. Market risk:
This refers to the risk of the property market crashing which will affect all assets in the same class. Diversification of assets by buying properties in different states may mitigate smaller-scale crashes.
How to deal with it: Completing thorough due diligence on the market before investing will give an understanding of whether that market is set for upward or downward movement in the short to medium term. Finding out the supply of property coming up in the area, versus the demand from people will also help make an educated decision on whether that market is due for movement and if so, which way.
2. Liquidity risk:
Liquidity risk is the possibility of an investor being unable to buy or sell when desired due to limited opportunities in quickly selling a property.
How to deal with it: Invest in urban suburbs in high demand and low supply.
3. Specific risk:
Refers in property investment to the risk of purchasing a property that is loss-making or giving sub-optimal return-on-interest.
How to deal with it: Careful research of properties before purchasing can prevent this from ever happening, otherwise diversification of assets in different states can mitigate this.
4. Sovereign risk:
Refers to unfavourable government legislation that results in investment losses.
How to deal with it: Invest in countries and regions that are politically stable, and keep informed on legislation relevant to real estate.
5. Credit risk:
This is the possibility of an investor or in some cases, a lender being unable to service payments.
How to deal with it: Have a buffer of cash savings for worst-case scenarios such as this in order to prevent mortgage default.