Every Real Estate Deal Comes With Some Inherent Risk
By JD Esajian on February 23, 2015
Almost everything you do in life carries at least some degree of risk. Seemingly mundane tasks such as driving your car or walking your dog could lead to trouble under the right circumstances. This doesn’t mean you will never drive a car again. All it means is that you need to assess how risky a situation is before you get yourself involved in it. Investing in real estate is no different. Even the safest deals will have some level of risk if certain things don’t go as planned. It is important to look at the worst case scenario, but you can’t let your fears get in the way of your business.
There is a fine line between playing out the worst case scenario on every deal and letting it effect how you invest. You should always know everything about the deal you are getting involved in. If you don’t know the risks associated, you shouldn’t complain if things don’t go as you planned. The key is to weigh these risks with the rewards of the property. If there is a good chance that the property you are buying is in wetlands and may not be able to be repaired, the risk is not worth the reward – regardless of the purchase price. The first step in evaluating risk is to know all of the most common outcomes and scenarios with the property. Only after you know what you are getting into can you decide if it is worth it for you.
It is also important not to let outside interference impact your decision. If you go to enough investment club meetings or real estate websites, you will probably hear a horror story or two from fellow investors. What has happened with others should never be an indicator of what will happen to you. You may come across a great rental property scenario, but because someone told you that being a landlord is more trouble than it’s worth you may decide to pass. Every area, from wholesaling to rehabs, carries their own risks. If you let others impact how you invest, you will never buy anything. For every two investors that say how great a property may be, there will be one loud voice offering a different opinion. Listen to everyone, but remember what has worked or doesn’t work for someone should have little to no impact on you.
Some of the highest paid people on Wall Street are paid to assess and manage risk. It should be no surprise that the best real estate investors have mastered risk tolerance and can quickly assess the strength of a deal. If you accept that every deal will have some degree of risk the next step is to deal with it. Not only is there risk on deals but there is risk with almost every area of your business. Spending money on a new marketing campaign can be a risky proposition. Hiring a new contractor has risk. You will find that almost everything you do in the business has risk and the key is to deal with it. Ignoring it and dealing with it are two very different things. If you ignore it you do not prepare for it and are caught off guard when it happens. Dealing with it means that you acknowledge that there is a chance it can happen at some point and you have contingency plans just in case they come to fruition.
One of the things that make risk so unique is that different people view risk in different ways. Some people would never jump out of a plane even if there was a pile of gold waiting on the ground while others would do it just for fun. What properties and areas that you find risky others may see no issues at all. The more deals you close the more comfortable you will start to become in different ways of investing. Like anything else you do in life there are two different styles to approach something you are unsure of. You can dive right in with two feet or you can dip your big two in and gradually get started. However you decide to deal with risk is up to you but you shouldn’t be afraid of the water. Eventually you need to try new things and different areas if you want to grow as a business and be successful.
Taking risks should not be confused with taking unnecessary gambles. If you gamble on a market or on a property you are leaving your fate largely in other people’s hands. You always want to be in control of every situation and in control of your risk. Some things will be out of your control but invest blindly or without knowing the downside. Most investors don’t have the wherewithal to endure more than one or two bad deals. Don’t bet your business on unnecessary gambles. There will always be other deals that will come down the pike.
You will need to take risks to be a successful investor. If you wait for a perfect, risk free deal to come along you may be waiting a very long time. As long as you know all of the risks associated and can manage them you can confidently move forward with the deal. Risk will always be there you just can’t let it paralyze you.