The premise behind any investment opportunity is to obtain something with the hope of a greater reward in the future. Investing in real estate is no different. In spite of what you may believe, there is no such thing as a risk free investment. Every property you buy has at least some degree of risk associated with it. Like most other investments, the greater the risk the greater the reward. For every one property you will hit out of the park, there will be ten others that you will have to work to secure a profit on. It is the one out of ten that goes the other way and you risk losing money that you have to stay away from. Luckily, there are systems to use that mitigate risk and allow you to invest wisely.
The best way to avoid a bad property is to not get involved with one at all. This may seem obvious, but there are too many examples of overanxious investors buying property sight unseen or based on a hunch. If the property does not follow the criteria that you have set forth in your investing plan, you need to have the discipline to walk away. This may not always be easy to do when you are slow, but passing on a deal is often the best thing you can do. At the very least, plan for the worst and hope for the best.
As a buyer, you need to know everything about the property as you possibly can. Your due diligence, or lack thereof, will be evident in your offer and what you intend to do with the property after you acquire it. Before you buy, you should have an exit plan and at least a few backup plans in the event your first option isn’t successful. The more options you have, the less risk the property holds. If you are buying with the hope the market turns around or that a tenant will pay 20% over market rent, you may be hoping for a long time.
Risk may also be attributed to the type of financing you have on the property. If you paid cash, you can always have a fire sale and get what you can. The worst case scenario would be to rent for a year or to take a home equity line of credit. If you have taken a short term loan, you will be paying every day the property goes unsold. This may lead you to take a bad deal just to get out of it. You are adding debt to the property every day and the market may have shifted from the time you bought it. Your options are limited and your risk is increased due to time restraints.
The more demand for your property, the less risk you have. If you bought mobile homes or even a condo, your buyer pool is reduced to begin with. Your property is riskier due to the fact that you need a specific buyer to get out. The same applies to the neighborhood you buy in. There are certain parts of Detroit where you can buy property for literally hundreds of dollars. However, odds are you won’t be able to do much with it because your buyer pool is small and the neighborhood holds no appeal.
There are risks associated with every investment. Making a small profit on a deal may seem like the worst thing, but the true worst thing is to lose money on a deal. Do your homework on every property, shop around for the best financing options and only buy good homes in good neighborhoods. If you do this you will greatly reduce your risk on every deal.