Real Estate investment is a risky business. Things can go wrong and often do.
If you want to be truly successful with real estate investment then you must do everything that you can to minimise your risk.
No pain no gain right?
The returns in real estate investing are worth taking the risk over aren’t they? If I didn’t believe that then I would not have been in the real estate investment industry all of these years.
But right from the very first day I looked for ways to minimize my risks and I am pleased to say that this has worked really well for me. No matter how much experience you have in this game you need to do this.
So in this post I am going to provide you with the seven ways I minimize risk with real estate investing
What are the main Risks with Real Estate Investment?
If you are new to the property investment game then you need to be aware what the main risks are. Even if you have been involved with property investment for a while it doesn’t hurt to be reminded of these risks. So these are the main risks with property investment as I see it:
- You purchase a property in a bad location
- You purchase a property in such poor condition that it is not viable to fix it
- The conditions of the property market
- Finding and dealing with renters
- You purchase the wrong property
This is not an exhaustive list by any means but I believe that these are the most common reasons why real estate investments go bad. I have learned this from my own experience and through networking with other property investors.
You can never be 100% sure about a property project so what I am talking about here is taking calculated risks. Comparing the reward with the risks involved is something that you must do.
It is not worth taking a lot of risks if the potential rewards are minimal.
1. Do your Homework
I have said in several posts on this blog and elsewhere that you can never do too much research if you are involved with property investment. Unfortunately it is an area where many newcomers to the property investment world fall down and end up not getting the results that they were looking for.
OK I get it. It is exciting to acquire your first investment property and research is boring. I have seen experienced property investors purchase properties that they just fell in love with and then have this go bad on them afterwards.
If you believe that conducting research to find the best property opportunities is boring then you need to change your attitude on this. I get excited about performing the research because I know that it will uncover property gems for me that few others will find.
Never let your emotions take over with a property purchase. You must keep your feet on the ground at all times.
If you are looking for a rental property then find out if the property is in the best location. What are the average rents for this area? Are there similar properties in the same area that people rent? You need to know the demand is there.
Demand is essential whatever real estate investment strategy you are using. If there are very few people interested in buying properties like the one you are considering then you will have a tough time selling it no matter how good a restoration job you have done.
So research and then do more research. It is one of the best ways to minimise your risk with property investment.
2. Look at the Property before you Buy it
Surely this is stating the obvious? Well there are a couple of scenarios where this certainly applies. If you want to be a successful real estate investor in today’s market you need to be prepared to look beyond your local area. This is particularly true if you live in some of the wealthiest cities or states.
Towns and cities in other states may well be providing higher yields and better capital growth opportunities than those in your local area. Although it is possible to purchase a property in a far away location without seeing it I would not recommend it.
Yes you can use the Internet and technology to purchase a property easily these days but I strongly recommend that you view a property that you want to buy at least once. A lot of property investors are using property auctions and it is essential that you view all of the properties that you are interested in making bids on first.
There are a number of horror stories out there about investors buying properties at auctions without viewing them, only to find that there were significant defects and the whole thing was a bust for them. Don’t let this happen to you.
If you don’t take at least one look at a property then how can you estimate the amount of work that needs doing to get it up to scratch? Don’t rely on others to tell you this. Always view a potential property yourself.
3. Consider Different Areas
I have already mentioned this but this is not something that I just recommend for better returns, it is actually a good diversification strategy.
If you have all of your properties in the same area (city or town for example) and there is a major problem in that location, such as a large employer deciding to move elsewhere, then you are going to be in trouble.
When you have properties in different towns and cities across the country then you are diversifying your risk. OK taking care of the properties is a bit more challenging but you should be able to find good people to do this for you everywhere.
House prices vary in different areas. If one city experiences an upturn in house prices then another may experience a downturn. So think multiple areas for your property portfolio so that you minimise your risk.
4. Invest in Different Property Types
There are a number of different types of property available. Most investors go for houses but there are flats and larger properties that you can convert into multi-family units as well.
When you have a property portfolio that has different types of properties in it then you provide some protection against regulatory changes etc.
I have a mixture of properties in my portfolio. You may know that I like the multi-family strategy because of the potential returns it offers. But I don’t just have these types of properties. I recommend that you do the same.
5. Look for Properties below market value
You may think that I am stating the obvious here but a property that is seriously under market value and worth pursuing is fairly rare. When you come across these kinds of opportunities then I recommend that you act fast and buy those properties.
This is certainly a good way to lower your risk. Of course you need to run the numbers on the property and estimate what it will cost you to get it ready for the market. Just don’t dither on these golden opportunities because you won’t get that many of them.
6. Find a Good Mortgage Broker
The right financial deal can really help to minimise your risk. Unless you intend to use cash for your real estate investments then having a good mortgage broker is something that I highly recommend.
A good broker can find you deals that banks and building societies cannot match. They can save you a huge amount of money over time. If you are in the single family space then find a mortgage broker that specialises in this area.
7. Keep your finger on the Market Pulse
With all of the information available to property investors these days it is not too difficult to keep your finger on the pulse of the property market. I am not just talking about your local area here but across the country.
A lot of property investors have become unstuck in the past because they didn’t take account of property market conditions.
Although the US property market has a good history of growth there have certainly been some down times where prices have fallen considerably. You need to anticipate these changes and use them to your advantage.
When you know the market well it will be easier for you to predict a fall in house prices and make a decision to sell early.
The same goes for predicting a rise in prices and purchasing all of the properties you can at a low price to make the best returns.
My Final Thoughts on Minimizing Risk in Real Estate Investing
At the end of the day spreading your risk with real estate investment is the best way to go. You must Minimize Risk With Real Estate Investing. I cannot emphasise enough how important it is to do your homework thoroughly with each deal. I have backed out of deals that looked really good on paper but in reality were not.