Risky Business? Real estate investing certainly can be. It’s important to be your own risk manager to ensure you don’t get left holding an empty bag. With every property or deal you say yes to, you should conduct your own risk assessment to safeguard your investment dollars and your time from potential loss.
1. What is a Risk Assessment?
A risk assessment protects you, and your money. You should conduct one before you sign any papers or hand over any dollars. A risk assessment identifies any hazards you may be met with on your path to cash-flow and can help steer you in the right direction for success.
2.How Do I Conduct a Risk Assessment?
There are no exact rules for doing this – everyone, and every property, has a unique set of variables. First and foremost it’s important to detach from any emotional investment you may have in a given property. Why? When you invest with your heart and not your head you could end up crushed. Don’t do that. Use your logical side to be clear about what you want and how to get it. Next, approach your risk assessment methodically. Don’t skate over any details.
3. Identify Hazards/Concerns
So, you’re ready to do your own risk assessment. First up, identify hazards and concerns that may be associated with a deal. A great way to do this, especially if you’re a new investor, is to draw up an estimate of repairs based upon your building inspection report. To get true estimates, contact local vendors and contractors to get real-world price quotes. Research the area in which you are buying: know your market well.
Once you know the risks, it’s time to evaluate them. How serious are they? How much do repairs take out of your budget? What is your new anticipated cash-flow? Don’t look through rose-colored glasses: be realistic and firm when doing this. It’s all too easy to get pulled in by a good price on a fixer upper only to find later that it’s your checking account that now needs fixing up!
5. Put Your Plan Into Action
Once you’ve given a property the green light and know what you need to do, do it. Don’t wait. A leaky drainage pipe can become a much bigger problem when you wait. This is a key part to risk assessment: follow-through.
6.You’re Not Done Just Yet…
Once you’ve addressed problems, you probably want to relax and enjoy the cash flow. Well, you’re not done quite yet. Revisit your initial assessment to ensure you didn’t miss anything. Then, schedule a time to revisit your risk assessment and make updates when needed. Just like you, your property is always changing and getting older. Be proactive and save yourself money in the long-term.
You can save yourself a lot of money and worry by taking the time to be your own risk manager before jumping into a deal. Another great way to lower risk is to work with sellers that are highly recommended and with people whom you trust not to steer you wrong. Education, due diligence, networking and patience are your best friends.