Reducing Risk In Your Real Estate Business
By JD Esajian on February 17, 2014
Let’s face it; there is at least some level of risk in everything you do. Investing in real estate is no different. With every property you invest in, there is always the chance that you can lose money. While it is very obvious, the key to investing is to get involved with deals that offer the least risk possible. If you can make a profit, even a small one, on every deal, you will grow your business. If you take a step back by taking a loss, it can take you months to recover from. Reducing risk in your real estate business is essential to success.
Novice investors conclude that luck helps fellow investors choose what deals they want to get involved in. The truth is that there are keys and indicators that can guide you in choosing what properties you invest in. Some investors will look at areas to invest in, thinking that any property in a particular neighborhood will sustain or grow in value. This is certainly possible, but you would be wiser to focus on individual properties rather than making sweeping assumptions on an area. The demographics of an area are important, but if you focus on deals that make sense, you can reduce the risk of losing everything.
There is an allure to try to hit a home run on every deal. If you are lucky, there will be one or two deals a year that you are set up to really take advantage of. Every other deal you get involved in will produce modest gains at best. That being said, you should focus on deals in safe areas with high population and stability. You may make more money buying the inexpensive property in a high crime area, but you also take the chance that your work may not equal the return you expect. If you focus on areas where the jobs are and that have shown steady growth in the past, you will not be as susceptible to market fluctuations.
Along the same lines, it is always better to invest in the worst house in the best neighborhood than the best one in a bad area. If you have eight similar houses on the street with higher values, yours has only one way to go. You will have a much harder time trying to have values catch up to a property in a bad neighborhood based strictly on comparables. You can do a great job with your rehab and truly have a quality home, but buyers look at area sales to set the market. If the market is low, they will have a difficult time justifying a higher sale, even if the work you have done warrants it. If you can buy in a good neighborhood and spend the money to improve the house, you are much more likely to get a greater return on your money based on the comparable sales in that area.
Risk is everywhere in the world of investing and in life. It can get boring at times trying to inch through the business making small profits on every deal. However, compared to losing money and having your money tied up in a property for months or years, slow and steady isn’t so bad. If you stick to properties that offer minimal risk, you will always be in the game when opportunity comes your way.