Risk management plays a huge role when investing in real estate - whether the risk is for a big or small purchase.
Disregarding the amount of risk taken in a deal may end up as a mistake that will cause a loss of money and reputation that could be very hard to recover. Therefore a professional investor has to take the time to assess the potential risks involved, consider if it is a risk worth taking, and determine if there’s a consistent amount of reward that can compensate those risks.
A wise investor must also measure risk mitigation. Many times, when a deal looks very appealing and attractive, risks are overlooked just because the investor is afraid to lose the alluring deal. For example, some areas are situated in Flood Zone. Although this does not necessarily mean that these areas have ever been flooded or will flood in the future, it does provoke the question if this is an area they’d like to invest in the first place. If the answer is yes, then the next question should be “what’s the cost of the insurance?” following a reevaluation of the ROI (Return On Investment).
The main question should always be: “ Why take the risk and buy there?”
Investors must critically think from different perspectives to get the best deal in the best area for the best ROI.
When flipping a property, there are many variables and unknown items to consider. Some of which can’t be detected upon first glance. There could be some foundational, electrical, water piping, mold, or insulation issues that were not properly assessed in the first place and appear later on through the repair process. These unforeseen repairs could end up in loss of money, time and reputation, therefore the investor should make sure there’s enough “meat” and profit in the deal to compensate for these loses.
I have been personally mitigating investment properties for over two decades - all have taught me a lot of lessons. In 2005, I had bought a 12 unit apartment complex in Galveston Texas. The property itself was in a great condition, fully leased and showed a great ROI and cash-flow. Even though we had the proper insurance required from the bank, the aftermath of Hurricane Ike caused many tenants to flee the area. Rent wasn’t paid for several months and we didn’t have sufficient funds to pay the mortgage debt service. Had we known that we could have insurance coverage for “Loss Of Income” then we could possibly avoid the property from being foreclosed by the bank. A lack of knowledge and appropriate assessment when mitigating can cost you everything.
Even when purchasing a brand new home (low risk), the investor should look to mitigate and assess the risks.
Here are some questions to ask:
What’s the demand for rental properties in this area?
How many days does the property stay in the market before finding a tenant?
What is the profile of the average tenant in this area? (Average income, type of jobs,family or singles etc.)
What’s the proximity to any industry? (Hospitals, airports, shopping malls etc.)
How good is the school district? (All school districts are rated between 1-10)
Is there an HOA (Home Owners Association) in place, and how much they charge?
What would be the property insurance in this area and how much it would cost?