| Risk | Description | Example |
|---|---|---|
| Business Risk | Income varies with economic activity and market conditions. | High vacancy rates during a recession reduce rental income for office buildings in downtown areas. |
| Financial Risk | Leverage magnifies returns and losses, depending on debt terms. | A property financed with 80% debt faces financial strain when interest rates rise. |
| Liquidity Risk | Selling real estate can take time, requiring price concessions. | A retail mall takes over a year to sell during a market downturn. |
| Inflation Risk | Returns may not keep up with unexpected inflation. | Fixed rents in long-term leases fail to offset rising operating costs due to inflation. |
| Management Risk | Returns depend on property management quality and efficiency. | Poor tenant selection leads to frequent vacancies in an apartment complex. |
| Interest Rate Risk | Rising rates lower property values and increase financing costs. | A commercial property’s value drops as higher interest rates deter potential buyers. |
| Legislative Risk | Regulation changes can negatively affect profitability. | New zoning laws restrict a property’s redevelopment potential, reducing its market value. |
| Environmental Risk | Hazards or contamination lead to significant costs or reduced value. | Discovery of buried toxic waste near a property imposes cleanup costs exceeding property value. |
Adapted from:
Real Estate Finance & Investments by William B. Brueggeman; Jeffrey D. Fisher