How Do We Avoid Risks in Real Estate?
Did you know just as many people, if not more, lose money in real estate as make it? Wait a minute….. I thought “you can’t go wrong in real estate” and “they are not making any more land!” While it is true they are not making any more land, you can “go wrong in real estate”! Believe me, I have had my butt kicked pretty good on some deals from taking too much risk.
Now don’t jump off the bridge completely here when I say ”we don’t take risks when we invest in real estate”. Let’s face it, there is risk with investing in ANYTHING! However there are very different types of risks and strategies you can employ that significantly reduce your chances of losing in the real estate investment game.
First let’s talk about risk. Risk is investing in a stock that you got a “hot tip” on or is the “next big thing”. Risk is speculating in real estate that the market is going to appreciate and that’s where you make your money. Risk is buying properties with a low cash flow and saying “well I can write the losses off on my taxes. My accountant says real estate will help me offset my income with tax write offs so I don’t need to make money on it every month.”
Excuse me? Are you serious? Why would you buy something that does not make you money or that will lose money? Who cares if you get a tax write off if your new acquisition loses money?! How about buying something that pays you every month and off-setting that income with the tax advantages of real estate? FYI, that’s what real estate investors do. Don’t just buy a piece of real estate because your broker says it’s a good deal. Also, don’t make a private note investment without fully understanding the fundamentals and financials of the deal. Not the ones someone hopes for but the real deal numbers.
Okay, nuts and bolts… Why do I say “We don’t take risks when we invest in real estate”? Because we have and we have lost. Because I listened to others about the magic of real estate and it didn’t go as planned. So today we invest strictly on fundamentals. When buying hold properties I want the real deal numbers as it performs today then I want it to make money the day I buy it and every day after that! Moreover, I want upside in raising rents, lowering expenses and increasing my equity through capital appreciation. Notice I said capital appreciation not market appreciation. Capital appreciation is increasing the value based on what you do to the building. On short term properties the money is made on the buy period. You need to buy at a huge discount so you can SALE IT AT A DISCOUNT! If you’re going to hold short term and try to sell at what you think market value is then be prepared to hold the property while you test the actual market value. And if you’re wrong, priced too high, overlooked something on your property that is deterring buyers… good luck. Hopefully you don’t have a hard money loan on that thing that your paying for every month, on top of taxes, insurance, utilities, etc.
I have made the mistake of buying properties and having them over-leveraged because some guru showed me how and told me the market would support it. Well let’s just say he wasn’t the one holding the proverbial “bag” at the end when the market crashed. We call that, live and learn. See, when you know a market so intimately for a long period of time and when you have seen the top and the bottom, you start to understand the cycle. Moreover, you understand that the market cycle is not the most important thing when investing because it is very difficult to predict and time. It all boils down to a math problem. That’s why I love real estate investment. It’s a math problem and it either makes sense or it doesn’t. What is your ROI (return on investment) going to be? If you are investing without knowing your ROI, please stop unless, of course you like those losses to offset your income 😉 Oh and by the way, only a “real estate professional” can write off all of their real estate losses. If you do not meet this tax designation, and most don’t, you may not be able to write off much at all in the way of losses. Have an intelligent conversation with your REAL ESTATE accountant about that.
We feel like we don’t take risk because, 1. We invest on the fundamentals of the property 2. We have our numbers and systems down to the gnat’s butt. We know the market values, we know the rental markets, we know our costs of repairs, we know our funding costs, we know our carrying costs AND we plan on things not going perfectly and give ourselves room via vacancy reserves, repair reserves and undercut what the market tells us for rental rates and re-sale values. If we get market prices, that’s just the whip cream on top of our ice cream. If there is market appreciation or we undershot our numbers, well of course that’s just the cherry on top. Regardless, we are always getting the ice cream and never left with an empty bowl.
For my investors with current relationships with us, I have a couple single family home hold properties available that provide double digit returns, are already rented and cash-flowing and available now. I also have an awesome investment opportunity for a 12 month note on an apartment building (415k) that pays double digit returns and has a huge equity position! If you have interest in any of these investments please contact me at email@example.com or 509-414-5123, or contact your Extant Realty Investment Broker representative.
The investment opportunities above are not general solicitations. You must have a previous relationship with us to invest in these properties. There are SEC state and federal law requirements regarding investment opportunities. Please contact your Extant Realty Investment Broker for more information regarding out policies and services.