In this time of uncertainty, investment risks are growing. However, there are also opportunities that we usually don’t know how to take advantage of. For this reason, when the winds of recession blow is when the money should be put into rent. So, today we will outline the main risks you should be aware of.
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What Investments Give Passive Income?
Passive income is income that doesn’t come directly from your salary. Such as valuations, dividends, rental income, etc. The consensus proposed by the expert Tian Rodríguez (2022) is that the flows of your investments should pay the bills. That’s financial freedom. In this sense, here are some ideas:
- Real estate: Historically, real estate has been a safe haven asset in times of uncertainty. The demand for housing is not receding, but advancing. However, it is important to invest where there is potential. For example, according to the Financial Times (Cedro, 2022), Miami is the best city to invest in the U.S., as more and more people are attracted to the quality of life. Especially now, thanks to FIFA’s announcement to name Homestead the host of the 2026 World Cup. Ultimately, this increases the value of real estate and reduces investment risks.
- The
capital
market is probably the most popular because of the large amount of money it moves. While investing in stocks is generally risky, there are people like Warren Buffett who have made a fortune investing in companies and waiting for appreciation. This can be a good option in the long term, as volatility is often high and dangerous in the short term. - Fixed income
and liquidity products. Just as the investment risks are not high, the profitability is usually not high either. These financial products work well in times of economic crisis. For example, rising interest rates make these products more attractive. However, raising interest rates has an impact on economic growth and is often a desperate option to control inflation.
Here are the top 5 investment risks
1. Systemic
Systemic investment risks are those that affect the entire industry. For example, if you invest in a diamond company and the commodity goes up the next day, every company in the industry will be affected, not just yours.
2. Liquidity
This mainly affects those assets that can’t turn into money quickly. A property located in a city with no potential is an example, as it can be difficult to sell. The same goes for the shares of a company that goes straight to bankruptcy.
3. Inflation Investment Risks
Inflation usually affects the population due to the increase in the prices of goods. This means that people no longer have the same purchasing power and businesses start to lose money due to widespread household savings. Real estate is a great shield against inflation, as rents tend to adjust with this price rise.
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4. Credit risk
According to Solunion (2022), credit risk occurs in the event of non-compliance with obligations. In the case of companies, it’s when the customer looks bad and doesn’t pay the bills. With real estate, it occurs when tenants don’t pay rent on time.
5. Political and legislative risk
It is true that emerging countries are sometimes more profitable because of their growth potential, but they are also riskier. This is mainly due to political and legislative instability. Laws that directly affect the company and its investments can be passed by Congress and thus affect the entire industry.
How to reduce investment risks?
When investing, the most important thing is to understand the risks and create action plans. In this sense, there are a series of strategies to mitigate risks, such as:
- Diversify your portfolio.
- Understand your market and your goals.
- Track your investments.
Changes in the market are unpredictable. However, with this knowledge, you may be able to act better in the face of investment risks.
The real estate market in Miami is one of the safest historically. Because of the quality of life, more and more people want to move, which benefits the real estate industry.
If you are interested in investing in real estate in Miami, at PFS Realty we know the market and understand it. Do not hesitate to contact us.
References
Cedar, S. (2022). Miami was highlighted as the best city to invest in the United States. Infobae. https://www.infobae.com/america/eeuu/2022/10/06/miami-fue-destacada-como-la-mejor-ciudad-para-invertir-en-los-estados-unidos/
Rodríguez, T (2022). “Let your cash flows pay for your luxuries”: this is the secret to balancing your finances. Semana Magazine. https://www.semana.com/semanaplay/tranquilidad-financiera/articulo/que-sus-flujos-paguen-sus-lujos-este-es-el-secreto-para-equilibrar-sus-finanzas/202203/
Solunion (2022). Credit risk: What types of risks can your company face? https://www.solunion.co/blog/riesgo-de-credito-que-tipos-de-riesgos-puede-afrontar-tu-empresa/