Assessing Risks in Direct Real Estate Investment

You are analyzing a residential real estate investment in an urban market. The property in question is a multi-family apartment complex purchased at a price of $2 million, with an expectation of generating annual net operating income (NOI) of $150,000. After purchase, you project that operating expenses will rise by 3% per year, and you intend to hold the property for 10 years. You also expect a long-term annual appreciation rate of 4% for the property value.

Considering the current market conditions, interest rates, and the overall performance of the real estate market, discuss the various risks associated with direct real estate investments like this one. Specifically address market, credit, liquidity, and operational risks. Additionally, consider how each risk could impact the investment over the holding period and suggest potential strategies to mitigate these risks.