Fear of risk is reason that many would be investors fail to get started, and even experienced investors fail to live to their full potential. It’s smart to acknowledge potential risk. It’s just not smart to let it steal what should be yours. Fortunately, there are plenty of ways to reduce risk in real estate investment.
LLCs, S Corps, trusts, and other legal entities are an important liability reducing tool for real estate investors. They can help protect privacy, reduce the appeal of investors as a target of fraud and opportunistic criminals and malicious or frivolous lawsuits. They can preserve assets and income in case of lawsuits, relationship issues, and even potentially bankruptcies. Don’t wait to set one up. Do it early, and learn how to use them right.
Buying real estate without a title search is just gambling. Without a thorough title search, and knowing what is in it, investors really have no idea what they are buying. You won’t know how much debt is attached to the property, and in turn, what the real value is. You need to know that you are buying from a seller who has the authority to sell, if there are mortgages, tax liens, mechanics, liens, or past taxes due on the property.
Having insurance is just smart. That’s what offsets and protects you from risk. That may include title insurance, hazard insurance, flood insurance, wind and storm insurance, and maybe even business insurance. Not many people love paying insurance premiums, but you’ll be glad you have it when something happens. Of course, insurance companies aren’t always fast to pay out, and rarely will want to pay as much as they should, but a good attorney can help.
Use of financial leverage is also a way to reduce exposure to risk. You should never put anyone else’s money on the line, at risk, if you aren’t confident in the opportunity working out. Yet, financing can help lower your personal exposure. For example; if you use a 50% LTV loan instead of paying all cash, you have half as much capital at risk in any one property. 90% financing reduces your exposure to 10%. 100% financing theoretically gives you a zero-risk scenario.
Partnering up is another form of leverage and risk sharing. Savvy financial legends like Zell and Buffett use it, as do major corporations. You can bring in one capital partner, or engage in the market with multiple partners. This can be done with loans, equity sharing in LLCs, funds, crowdfunding, REITs, JVs, and other arrangements. Explore your options and find the right fit.
Diversify Your Portfolio
Partnering up and using financial leverage can free up more cash and credit, and can enable you to investing in a broader range of properties. There are factors which will remain out of your control. Like the market, the weather, and regulations. Spreading your eggs across multiple baskets, in multiple locations is just smart. It will help minimize risk, while keeping income consistent, and maximizing growth potential.
As with title searches; you don’t really know what you are buying, or how much it is really worth, unless you get properties inspected. It doesn’t matter if it is an ugly 100 year old home, a condo, or a brand new million dollar home, you really don’t know what issues could be lurking. Sometimes repairs may cost several times what the property is selling for. These can still be deals, but only if you bid right. Know the condition and issues, and potential costs. Know the risks. For example; will it keep deteriorating in its current state? Could it be condemned? Could the city pile up fines and fees for code violations?
There is no type of investment which is 110% risk free. Keeping money in the bank or under your mattress, or even in a safe isn’t risk free either. What’s riskiest of all is being paralyzed by fear of risk. Instead, use the above to identify what you are really buying and how much it is worth, and then to minimize those risks to the bare minimum. Then take bold action, fast.