Examining the Various Types of Real Estate Risk

All investment options come with a certain amount of risk. While the amount of risk that you’re willing to take may dictate the type of investments that you make, it’s important to note that there is never a sure thing in the world of investments. While some investments provide only one type of risk, real estate investors understand that there are multiple types of risks involved. Understanding the differences in these types of risks gives you the ability to determine what investments are worth it for your personal investment strategy.

Liquidity Risk

Liquidity risk is associated with the amount of liquid assets that you have on hand to continue to fund your investment. For instance, when you purchase an investment property, there is a chance that you could run out of money, leaving you unable to pay the mortgage, maintenance costs and other fees associated with property ownership. Streitwise is relatively illiquid ,compared to traditional publicly traded stocks, with a 1-year lockout and 5-year redemption plan.

While the risk of being too illiquid and not having access to instant capital is obvious, there are drawbacks to being too liquid as well, including higher likelihood of volatility. Just one negative news cycle can lead to a mass sell-off of a highly liquid investment, such as a publicly traded stock. The most cited negative to liquid investments is the higher price and corresponding lower return they generally provide, known as the liquidity premium.

Market Risk

Market risk is the most common type of real estate investing risk. It’s simply the risk associated with investing in an ever-changing market. Since 2020, the Covid-19 pandemic has impacted every industry, including real estate. With a current drought in the USA housing inventory, there are fewer options for investors to purchase. Since there are fewer homes, sellers are asking more for properties that are for sale. This is an example of market risk.

Streitwise has performed relatively well through this market risk by having strong corporate underwriting, strong credit tenants that were able to largely pay rent through the pandemic, and conservative leverage.

Asset Level Risk

Asset level risk refers to investment options that have an inherent amount of price volatility. Again, we don’t have to look beyond the housing market in the last couple years to see asset level risk in real estate. While the Covid-19 pandemic has driven up the value of residential properties due to low interest rates and a decrease in inventory, commercial properties, primarily in primary gateway markets have decreased in value. With so many industries being shut down by the pandemic, office spaces, retail facilities, hospitality venues and other types of real estate have often become less valuable. Since many businesses have shut down or shifted to a work-from-home structure, some commercial properties are worth much less than they were just two years ago.

While our offering is focused on commercial properties dependent on rent-paying tenants, our focus on secondary markets in suburban-urban locations has created a popular option for office workers to locate to. Our investors have continued to see ongoing success in the face of asset level risk. Most tenants are expected to return to their office spaces in 2021 and we have continued to sign new leases and fill vacancies, meaning our investors have and will hopefully continue to see success in their commercial investments.

Interest Rate Risk

Interest rate risk refers to the potential losses that an investor may suffer due to fluctuations in interest rates. At the moment, interest rates are at historical lows which is great for investors who want to leverage funds in order to purchase additional investment properties. It also bodes well for fix-and-flip investors who want to sell a home. However, if those interest rates climb, mortgages will become more expensive which will impact investors on both the front and back ends of the deal.

Leverage Risk

Leveraging funds in real estate is the use of other peoples’ money in order to purchase an investment property. Whether this is through a mortgage, a credit union, private investors or another source, leveraging funds can help magnify the gains on a property since the investor has less of his or her money tied up. However, leveraging funds can also magnify losses. If something goes wrong with the investment, an investor may find himself or herself unable to pay back creditors, creating a risk of defaulting on a loan.

Fee Risk

Fee risk simply alludes to the risk associated with the various fees that come with purchasing a property. Property taxes, interest rates and other fees are a part of property ownership that comes with investing in real estate. No matter how risk-averse an investment seems, there is always a possibility that an investor may be unable to pay these fees, creating the concept of a fee risk. In many cases, investment firms don’t even disclose certain fees, instead tying them into the fine print.

Certain financing structures, such as the waterfall structure, may lead to diminished returns due to investment fees. Fortunately, we have constructed investment options that help negate many of these fees, leading to more profitable investments.

While real estate is a great investment option for investors looking to diversify their portfolios, there is always risk involved. However, Streitwise’s investment model has continued to withstand ongoing economic fluctuations and other issues that can make investments even more risky. Our structure ensures that our investors are in the best possible position to succeed, putting more money in their pockets.

Adam Luehrs

Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.

SW Manager, LLC (“Manager”) is a wholly-owned subsidiary of and controlled by Tryperion Holdings, LLC (our “Sponsor”). Manager is the external manager and advisor of 1st Streit Office Inc. (“1st Streit Office”) and 1st Streit Office Operating Partnership LP (our “Operating Partnership” and, together with 1st Streit Office, “Our Current Offering”). 1st Streit Office is the sole general partner of our Operating Partnership, through which all of our assets will be owned and substantially all of our operations will be conducted. All references herein to “Streitwise” refer, as applicable, to Manager, 1st Streit Office, the Operating Partnership, or any of their affiliates (collectively, the “Streitwise Entities”). Unless explicitly stated to the contrary, all references to “we,” “us,” and/or “our” shall refer to the Streitwise Entities. By using Streitwise, you accept our Terms of Service and Privacy Policy.

An offering statement regarding this offering has been filed with the SEC. This offering is structured as a non-traded real estate investment trust, or “REIT,” under Regulation A+ of the JOBS Act. The SEC has qualified that offering statement which only means that Streitwise may make sales of the securities described by that offering statement. It does not mean that the SEC has approved, passed upon the merits or passed upon the accuracy or completeness of the information in the offering statement. You should read the Offering Circular before making any investment which is available here: streitwise.com/oc

You may have been referred to Streitwise by a third-party (“Solicitor”). Compensation to any Solicitor may be up to $200 per email registration. A Solicitor may promote and/or may advertise Streitwise’s investment services and may offer independent analysis and reviews of Streitwise’s services. Streitwise and any Solicitor are not under common ownership or otherwise related entities. We cannot ensure the accuracy of the data provided from any Solicitor.

Performance: Past performance is not a guarantee of future results. All historical returns, target returns, or hypothetical projections may not reflect actual future performance.
Risk: This investment involves a certain level of risk and may result in partial or total loss. We cannot guarantee that we will reach our target return for our investors.
Tax: Prospective investors should confer with their tax advisors regarding the tax consequences based on their particular circumstances. Neither Streitwise nor any Solicitor assumes responsibility for the tax consequences for any investor.
Liquidity: Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term should not invest. See Stockholder Redemption Plan in the OC.

¹ Dividends & returns: Current annualized dividend based on the most recent dividend declaration as of the quarter ending 3/31/2024. Dividend return calculations based on NAV at the time of dividend return. 1Q24 dividend payout of $0.11/share equates to a 6.2% dividend based on the current NAV. The REIT has averaged a 7.2% annualized return since 2020 and a 8.3% annualized return since 2017 based on the average NAV for the respective periods. See Quarterly Report for all returns history.
² Source: FTSE NAREIT All Equity REITs vs S&P 500.
³Sponsor Performance: Related to investments by Sponsor, Tryperion Holdings, as part of one of its prior programs, and not of any of the Streitwise Entities. Reflects gross IRR on realized investments in the Sponsor’s investment portfolio since inception. Sponsor performance data as of 4Q23.
⁴Target returns: We will seek to invest in real properties and other real estate-related assets that we believe can produce a strong return through a combination of cash flow and appreciation. We cannot guarantee that we will reach this target return for our investors.

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