We’ve said it before and we’ll say it again: every investment comes with some level of risk. This isn’t a surprise. Our risk tolerance varies based on personality, financial circumstances, goals, experiences, and our foundational knowledge of how to invest and manage money.
We’re not here to tell you what level of risk is right or wrong for your circumstances. However, we would say that every investor needs to not only manage their risk well, but they need to craft the kind of portfolio that allows them to take bigger risks without fear.
We do that by developing a portfolio with a firm foundation. This foundation should be built “defensively” — that is, with the idea of tight risk management and low-risk investments at the core.
These are investments with a proven track record, steady returns, and lasting value. While real estate is not known to be a low-risk venture, it is possible — and preferable — to leverage this asset class in your portfolio.
Real estate has proven itself time and time again to be a solid investment class. In fact, it is still the preferred investment method of some of the wealthiest people around. Andrew Carnegie, billionaire industrialist, is famously quoted as saying “Ninety percent of all millionaires become so through owning real estate...The wise young man or wage earner of today invests his money in real estate.”
Though Carnegie has been dead and gone for over a century, his wisdom continues to ring true. Real estate builds more wealth, more consistently, than any other asset class. It’s still considered one of the best investments you can make.
Maybe the idea of investing in real estate makes you nervous. Maybe your risk tolerance is very, very low. You want to take advantage of this legacy of wealth-building, but your risk-aversion is keeping you from jumping in with both feet.
This is where defensive real estate investing changes the game.
3 Essential Strategies for Defensive Real Estate Investment
Target the Right Real Estate Class
You’ll find that different types of real estate investment (and their strategies) carry varying levels of risk and volatility. For example, 2020 saw single-family residential real estate flourish. At the same time, hospitality real estate, such as hotels, and office and retail real estate, all floundered in the wake of the pandemic.
While these sectors will no doubt bounce back, they are more inherently tied to the economy as a whole. Something like a pandemic is not common, but economic twists and turns that result in higher unemployment or slow wage growth impact non-residential real estate more profoundly.
Single-family residential real estate is known to be the most tenacious and desirable type of real estate. This is partly because there is always demand for it. People need a place to live — period!
Balance Your Borrowing
One of the biggest mistakes a new investor can make is scaling too much, too fast. While every investor must scale their portfolio to build real wealth, the timing is important. Investors know never to invest more than they are willing to lose.
Borrowing can be enormously easy in real estate. This leverage is one of the key benefits of real estate investing. However, borrowing too much can overextend your resources. Not only do you have to contend with more debt, but more properties demand more from you as well. Be careful to scale when it makes sense: when you can comfortably take on another investment and its demands. Always be cognizant of how your investments stretch your resources and manage them wisely.
Leverage Experience
You can leverage far more than money in the real estate investment game. The investors who expose themselves to the greatest risk are those who have no experience and try to do it all alone. Investors better mitigate their risk when they leverage the expertise of others in the industry.
That can include networking and mentoring under more experienced investors. It means utilizing the services of property managers, contractors, and turnkey companies. Find accountants and lawyers who have experience with real estate investment. When you take advantage of these resources, you not only save yourself time and hassle, but you reduce your risk exposure: be it from buying properties or filing your taxes.
While no investment is a risk-free experience, utilizing the right risk management strategies and resources can build wealth in any market climate.
Let our expertise build your world-class real estate portfolio.
