Risk. Every investor has heard the term, and often very early on. Despite this, we often misunderstand risk — putting it into simplistic terms and talking about “risk management” as if everyone inherently knows how to do this.
But do we really know what it takes to assess and manage our risk as real estate investors? There is nuance to the concept of risk that must be taken into account. While turnkey real estate investors have much of their risk managed by their expert property management teams and attentive advisers, you must still know where you stand where risk is concerned.
A Real Estate Investor’s Guide to Risk Management
What is Risk?
The word “risk” often comes with connotations of danger. For real estate investors, this is true. But in a more specific sense, risk is your exposure to dangerous factors that put you at risk for loss or injury. In the context of real estate investment, risk is the exposure to that which can cause you to lose profits, increase investment costs, or otherwise damage your real estate investment career. This can include physical factors involving your properties, relational and reputation status, and money management, among other things.
What we all must understand is that every investment comes with risk. This does not mean that risk can not be reduced and mitigated!
Now, there is a difference between one’s tolerance for risk and your capacity for risk. Your tolerance is the risk that you are willing and comfortable with taking on. Everyone has a different risk tolerance — this can depend on your disposable resources, your experience level, and your personality.
These are the risks you manage and work to mitigate. They’re what you have control over — you can take these risks and manage and reduce their potential to hurt your investments. Risk tolerance truly comes down to your comfort level. The last thing you want is to lose sleep over your investments.
Risk capacity is what we refer to when we say “every investment carries risk.” This is the inherent, non-negotiable risk factor in every investment venture. In investing, the level of risk rises with potential reward. The lower the risk, the lower the potential for reward tends to be. Turnkey real estate investment tends to have lower risk simply because so much of that risk is managed for you.
How do I effectively manage my risk as an investor?
Do your homework.
One of the best and more vital ways to manage your risk as a real estate investor is to do your homework. That means you thoroughly research, communicate with, and investigate the companies that you partner with as a turnkey investor. Research markets that you want to be in and their efficacy for your portfolio.
Be sure to check out: 4 Risk Management Strategies for Real Estate Investors
Read the fine print.
I know most of us glaze over when confronted with legal or technical jargon. That said, there is a lot of legalities that go into an investment venture. Read the fine print of have it read by an expert on your behalf — this is especially important when it comes to taking out mortgages or sifting through tax law. The best way to protect yourself is to understand what you’re getting into.
We know that you’re supposed to be a passive real estate investor. That doesn’t mean, however, that you become a disengaged investor. Engagement is crucial. It allows you to not only form a bond with your turnkey partner, but it allows you to know more fully the state of your investments...and the steps you need to take next.
Keep organized records.
Record-keeping is an undervalued skill. We’re not just referring to your monthly reports or income, either. Keeping records means saving emails, getting things in writing, keeping tax documentation, and more. Should there be a problem or conflict, you don’t want to have to scramble to find pertinent documentation.
Continuing education is invaluable for real estate investors. While the barrier to entry is rather low for turnkey investors, the more you know about your role, responsibilities, market, and just how investing works, the better you can direct and discuss your investment future. It will also help you identify red flags!
Diversify your portfolio.
Portfolio diversification is key to risk mitigation. When you spread your investments over several markets, you insulate yourself from individual market risk. As you grow your portfolio, you will have enough properties in enough markets to sustain your passive income even if a property or market elsewhere goes south.
While risk can be a daunting prospect, managing your risk personally and through the help of your turnkey partner ensures that you stay on the path to financial freedom.
Start on the right track with effective risk management for passive investors. Talk to your adviser today!