Life is inherently risky and so it’s crucial to understand how to manage them. Have you ever wondered why the rich choose to live together in communities closed off from the outside world by iron gates? It’s more than just the fact that they like “nice things”. It’s partly because they are consciously in possession of the knowledge that thoughts, ideas, and attitudes are real things that dictates reality for them. This obvious point still evades most people. Attitudes are contagious and that’s why rich people avoid the mentality of struggle and poverty like the plague.
You can’t avoid risk in real estate investing, you can only control it. Before I show you the risks of real estate, I want you to properly frame how different people see risk in general. People perceive risk in all different ways. So before we consider what are the risks of real estate investing, we need to look at the different personality types.
There are five types of characters and they each consider risk differently
1. People who win by achieving comfort
This person’s primary goal is to just go through life as comfortably and stress free as possible. Everything this person does is designed to support their pursuit of comfort. Often these people are content life long employees that don’t “move up the ladder” so to speak.
2. People who win by being liked
Getting acceptance is this person’s goal. Winning is a distant second to being likable. This person will usually cripple your business if they achieve management because they avoid tough decisions that have to be made.
3. People who win by being right
Experts in specific fields are loaded with these personality types. People who win by being right don’t tend to accept criticism and new ideas. They often hit the wall with money, career, and relationships. They lack personal honesty and so consequently they don’t grow as people. Arguing with this person is pointless because they’ll always find a way to “prove you wrong.”
4. People who win by winning
Achievement is the hallmark of this person. They are motivated by winning. They will make the sacrifices required to win and they are competitive. They’ll find a way to gain an edge and stay ahead. They usually only quit something to pursue a better opportunity. This category describes all successful entrepreneurs and athletes. The downside is that some of them will go too far and compromise their integrity in order to win.
5. People who win through losing
Getting sympathy from others is how this person wins. They often experience self sabotage. They experience perpetual problems. They fulfill their victimization by creating the right circumstances and the corresponding excuses. “I’ve already heard all this stuff and I don’t the money anyways.”
Which one of these types am I?
Like me, you probably have aspects of all of these. Understand that you have a personality type that will never get ahead if you avoid perceived risk instead of learning to manage it. Now, let’s get to the good stuff with managing risk and properly taking advantage of getting started in real estate investing articles. If you don’t know how to properly invest, you are assuming the following risk.
Common real estate risks
Negative cash flow
If you need appreciation to make money and you’re not properly cash flowing, you have failed to manage risk. Cash flow in the wrong direction wouldn’t cut it with a mutual fund so why would it work with real estate?
Trouble renters
It’s harder than people think to get quality tenants. If you don’t know how to attract quality tenants, your rental property can be quickly overrun.
They need the property to appreciate in value
“Real estate always goes up in value” is what they tell you and for the most part that is true. Appreciation can take a long time in some markets so what if you’re cash flowing in the wrong direction that whole time? What if in 10 years it barely appreciates at all and you’ve lost money?
Repairs
If you don’t work vacancy and maintenance costs into your rental, you have failed to manage risk. You can easily be stung with a loss in appreciation through damage when you are anticipating the opposite.
Market job loss
Like I experienced in Michigan, your investments can be crippled from this one thing. If you are depending on one main employer, you have failed to manage risk.
Underestimate management required
I’m amazed at the number of landlords who think that they can just throw a tenant into their property and just basically collect the check on the first of the month. Unless you’ve managed risk by knowing some creative strategies to leverage your time, be prepared for management to take up a chunk of your time.
Lack of a game plan for exiting the property
Nobody gets rich being a landlord. Top level investors have multiple creative exit strategies at their disposal for tough markets and most inexperienced investors have “buy and rent” only at their disposal. The definition of risk should be depending on one scenario to come true.
Learn to manage risk in real estate
Do you know what creative real estate investing risks the most of? Your time, that’s it. How is it possible to avoid risking my money? Risk is managed with the simple philosophy of only buying what you’ve already sold for more money. If you follow that underlying way of thinking and you use the clauses in contracts that maximize your protection, you’ll assume almost no risk. In in real estate investing is to understand how to invest without your own funds. Your real estate investing success is assured when you learn to manage risk.
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