Nearly everything you do or attempt in life will include some form of risk. Some risk, like crossing a busy street for no apparent reason, doesn’t seem worth the reward. Of course, this is just a simple analogy. The point is that there are some situations in which the risk outweighs the reward. Conversely, there are scenarios in which the reward is well worth the risk. However, there is another alternative. What if you could mitigate risk to put the odds in your favor.
In the real estate world, there is no such thing as a slam dunk, risk free deal. Even the most conservative of deals carry some level of risk. The key to investing success is to mitigate your risk and know exactly what you are getting into before you do it. What you need to do is educate yourself as much as possible to reduce the risk and place the odds in your favor. Real estate favors the prepared. Make sure you are ready for what is to come.
Many new investors are in such a rush to get a deal under their belt that they often bend the parameters of what they consider to be a good deal. Instead of conducting the proper research, they hurry into a deal without doing their homework. All it takes is one bad deal to set your business back and leave you reeling. Every deal you get involved in, regardless of whether or not it is time sensitive, needs to be addressed with the utmost sincerity. You need to know everything about the seller, the property, the neighborhood and everyone involved in the deal.
If you blindly attempt to rehab a property, you can’t complain if or when things go wrong. You will only have yourself to blame if things turn south. It is an unfortunate reality, but many failed deals are due to gross negligence on the investor’s behalf. Make sure you mind due diligence, even when someone tells you otherwise. If you have a good relationship with someone, you still need to investigate the deal yourself. The alternative is to trust the decisions of someone else that you may not be able to vouch for. Any good investor will not take offense if you ask for a day or two to look at the deal and the property. If they are offended, there may be some ulterior motives for wanting you to close quickly. If a deal is too good to be true, it just may be. At the very least, you need to know exactly what you are getting into.
There is a fine line you need to walk when it comes to working with others: contractors, realtors, property managers and everyone else that you work with. This doesn’t mean that you should micromanage everyone you come in contact with, but if you give your contractor free reign of the property without an existing relationship there is no telling what will happen. Again, mitigate risk by minding due diligence. The risk of having issues come up with the property without you being present or active in the rehab is greater than the alternative. In a perfect world, you will build relationships up to the point that you fully trust everyone around you. However, until you get to that point, you should monitor every aspect of your business.
Not all risk is blind. There are some times that the numbers will tell you one thing and your gut says another. Most of the time the numbers will be the truest indicator of what you should do, but your personal experience also needs to be factored in. As long as you know the deal and can live with the results, the risk can be justified. Nobody ever wants to lose money on a deal, but there are times taking a loss can be the best thing to happen for your business. Nothing will teach a lesson about risk quite like losing money when you know you should have gone another way. Even when you know all of the possible options, you are still taking a risk.
There are times when not taking a chance can actually hurt your business. You risk being unable to grow your business and portfolio if you don’t pursue deals. There is nothing saying that the deals you are looking at now will be there in a few months. Sometimes your window to buy is only open for a little while and can quickly close. The market is constantly changing. What you can do today may not be there tomorrow. If you pass on every deal and wait for those that are virtually risk free, you may never close any deals at all. At some point, after doing your due diligence and knowing everything there is to know, you need to take a start and jump in. You know all the numbers and what you are getting into, but are scared of the worst case scenario. Things can happen unexpectedly on any deal, but if you wait for the next deal to come along you may be waiting a very long time.
Just like bad things can happen on every deal, the market can also appreciate unexpectedly and show you a handsome profit. As long as you know what the best and worst case is, you can live with the results either way. There is nothing wrong with taking risks, but you need to know that they are worth the reward.