Determining if real estate is high risk or low risk depends on you as an operator.
Are you a good operator?
If the answer is yes, then real estate can be relatively low risk for you.
But if you are a negligent, bad operator who doesn’t do his homework, then real estate can be very high risk for you.
Here are some things you can do to make real estate low risk for you:
Do your homework – Everyone needs to do their due diligence before purchasing a property. You need to know about the market, the building type, the rents, the renovations etc. before going in. If you do your homework right, the risk is much lower. You may need a power team of realtors, lenders, inspectors, appraisers, contractors, mortgage brokers etc. to help you do your homework. You typically can’t do it alone.
Get educated – Most people try to skip school when it comes to real estate investing, but an ounce of sweat can save a pint of blood. I recommend taking some classes, hiring a coach and getting a mentor if you are serious about real estate investing. Typically, the cost of a good education is the same as the profit you will make on one good deal, so the cost is negligible in the long run. Would you let your kids play piano without piano lessons? Most parents won’t, so why invest in real estate with no education? In the words of Benjamin franklin – an investment in knowledge pays the best interest.
Be diligent – Above all things, do not be negligent. Stay on top of what is happening. There are always changes happening in real estate and you must be aware of what’s going on. Negligence is expensive in the real estate field.
Be a good manager or hire a good manager – Someone must manage your asset, either you or someone else. If you are managing, make sure you are educated and know what you are doing. If you don’t want to manage the property yourself, find a good manager. Typically a good property manager is harder to find than you may think so you may have to go through several.
Don’t over-leverage – Leverage is one of the reasons why people get rich in real estate and also a reason why people go bankrupt. When you are leveraging, be responsible and don’t over-leverage. Make sure you can survive if something goes wrong.
Have a strong income going in – Real estate is somewhat of a rich man’s game. If you don’t have a strong income going in, perhaps you need to increase your income by going into sales or something else that can become high income. When I started in real estate I had no income and it was very hard to manage. Today I have a very high income and it’s much easier to operate in the real estate field.
Keep cash on hand – Always keep a strong cash cushion. I tell my students if you don’t have $100,000 cash on hand, don’t do buy and hold. You need cash just in case things go wrong. In real estate, something always goes wrong so you need to have large cash reserves to be able to sustain disasters as they happen.
So is real estate high or low risk?
Depending on you and the factors above, real estate can be either high or low risk. But if you are going to invest your money, please make sure you invest your time first.
Respect The Grind,
Stefan Aarnio
