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Memphis Real Estate Investing

4 min read

3 Ways Real Estate Investors Manage Unexpected Risk

Fri, Jan 10, 2020

riskmanagement-unexpectedrisk-realestateinvestmentOn some level, most of us fear the unexpected. We dread to see the other shoe fall or the tables turn. There’s an inherent level of risk in every investment. We know that by now. One of the greatest advantages we have at REI Nation — in turnkey real estate investment — is that we greatly reduce the risk and room for error for our investors.

This reduced risk only comes with diligent management, expert advisers, and a finger on the pulse of the real estate market.

There are plenty of risks you as an investor know about and can naturally expect. You research your markets. You carefully choose your turnkey partner. That said, there are risks that we don’t (and can’t) see coming. It’s possible and necessary for investors to preserve their wealth through risk management. When you guard yourself against risk, you not only prevent financial loss, but you ensure that your wealth-building efforts stay on the right track.

So how do the best of the best manage risks that we can’t see coming?

What’s the problem with traditional risk management strategies?

Risk management is an absolute essential in life. That’s right: not just in your investments. Risk management means that we identify known (even expected) risks and act accordingly in order to prevent financial loss and maximize financial gain. The problem arises in our limited scope of risk. Sure, we can anticipate common problems and try to cover all of our bases, but at the end of the day, we can’t always see risk coming. So what, then, is a real estate investor to do?

3 Ways Successful Investors Manage Unexpected Risk

Aim for the Long-Term

When it comes to investing in general, not just as is pertains to real estate investment, aiming for the long-term greatly reduces overall risk. This is because you are not reliant upon the conditions within a particular time frame to be successful. Whether it’s stocks or real estate, a long-term view (usually 5, 10, or even 20 years) gives the market conditions a chance to turn back in your favor. This allows you to more precisely time sales and acquisitions of new investments. 

Be sure to check out: A Passive Investor’s Quick Guide to Risk Management

Not only that, but the long-term buy-and-hold real estate investor also reaps the reward of rental income as long as they hold their property.

Beware of short-term investment deals. Anything that promises huge rewards in little time or little effort is subject to much greater risk if they are legit opportunities to begin with. Beware of investing emotionally or because you feel pressured by a deadline. Patience is a virtue, especially in real estate investment.

Expand Your View of Risk

When we think of risk, our notion is largely relegated to “something unexpected happens and I lose money.” While this is true, it doesn’t present the whole picture of risk. For real estate investors to take a better handle on both seen and unseen risk, we have to have a clearer idea of what risk really is.

Event Risk

Event risk is what we think about with traditional risk. These are things that happen — a market crash, natural disasters, so on and so forth. Different kinds of investors bear more event risk. Turnkey investors arguably bear less. Because your services are centralized, you don’t have to worry about a contractor going belly-up in the middle of your renovations. Your turnkey provider, in their diligence, ensures that your premier services are reliable and present.

In general, managing event risk is straightforward. Anticipate the scenario, plan for the scenario. A long view of your investment prevents the need to crunch timelines. Instead, having an emergency fund in place helps cover the unknown eventualities of event risk. 

Variability Risk

Variability risk is a less considered risk. It arises in unexpected or unknown results in an investment venture. For example, you could not profit to your expectations in a certain month or quarter. That income is important not only in the management of risk but in the functioning and progress of your investments.

Variability risk is, essentially, when performance and results don’t hit the mark. While there are many ways to handle this type of risk, real estate investors simply should know their numbers. Have your target goals, discuss what you can expect with your provider. If something does not hit the mark, you can see it readily and have strategies ready and waiting in the wings.

Ambiguity Risk

Ambiguity risk is one that real estate investors often face. This is the risk in the unknown. For us, that often means the risk in the ebb and flow of market conditions. We can never totally predict what the future has in store for the real estate market, even if we can make educated guesses.

In order to deal with this risk of the unknown and undefined, we must push and experiment. Don’t be afraid to break beyond what you already know. One of the key ways to do this is through portfolio diversification. We harp on this concept a lot, and for good reason. Things might go wrong in the one market you’ve chosen. You just can’t predict it. When you diversify your portfolio across multiple markets, you create a “safety net” that allows you to tap into the benefits of multiple markets, even if another market may be suffering. 

Emergent Risk

Real estate investors have less to worry about where emergent risk is concerned. These are the “come out of nowhere” industry developments and global changes that affect us. The advent of the Internet is an example, as are major political events and shifts, such as the September 11th, 2001 terrorist attacks.

These things affect our economy and impact investors. However, it is impossible to predict these events — some of which lie in industries totally outside of us. We can’t expect to cover all emergent risks.

What we can do is dedicate ourselves to continuing education and timely research. Don’t be ignorant of the news or market conditions where you invest. Pay attention to these trends. While we can never predict these events, we can look for red flags that lead to them and prepare accordingly.

Rely on Professionals

It’s impossible for any one person to successfully manage all of the risks facing them. As real estate investors, we know firsthand just how much there is to oversee and manage. This is why having a team of savvy professionals is essential. The turnkey investor must prioritize the services they receive.

Your team of professionals manages the smaller risks of maintenance and property management on top of bigger, less definable risk management through your portfolio adviser. Listen to the professionals. Learn from advisers and mentors. Most of all, choose the investment partner who holds your best interests as a top priority.

Start your best financial future with REI Nation today!

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Topics: risk management

Chris Clothier
Written by Chris Clothier

Entrepreneur, writer, speaker, ultra-endurance athlete, husband & father of five beautiful children. Chris puts these natural talents on display every day. As a partner at Memphis Invest, Chris addresses small and large audiences of real estate investors and business professionals nationwide several times each year. Chris is also an active writer, weekly publishing real estate, leadership, and endurance training articles.

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