Real estate investing, like all forms of investing, comes with some inherent risk. While many people have used real estate investments to become self-made millionaires, or even billionaire moguls, there are also examples of people who have lost everything on a couple of bad investments.
If you’re risk averse, but still interested in getting in the real estate game, there are several strategies that can help you reduce your risk profile.
Work With Experts
First, it’s important to work with experts – especially if you have limited experience in the real estate game. You should work with a team of real estate agents, lawyers, and even property managers to scout the best properties to add to your portfolio, estimate costs, and project future earnings.
Seasoned veterans in the industry will be able to spot things that you can’t. For example, you might tour the house together and find that your advisor notices points of damage you could have overlooked. Niche experts will also have different perspectives; for example, touring the house with an electrician will help you identify potential electrical issues that even an experienced real estate agent might miss.
Consulting with other experts is also a great way to negate the role of your own biases and emotions. You’ll get perspectives and opinions from a diversity of minds, which you can use to make better-rounded, more thorough decisions.
Do Your Due Diligence
Real estate investing decisions should never be made quickly or without the proper due diligence. These transactions typically cost tens of thousands to millions of dollars, so even a single bad purchase could potentially wipe out your savings and saddle you with debt for years to come.
That’s not to say that many real estate transactions end up this way. On the contrary, real estate values tend to rise over time. But it’s important to protect yourself and be as thorough as possible as you’re researching potential properties to buy and manage.
Start Small
Here’s an important and easy way to limit your exposure to risk: start small, especially if you don’t have much experience. It may be possible for you to buy a gigantic multi-family property if you stretch your budget to the limit, but that doesn’t make it a good idea. Instead, make your first investment using just a small portion of your savings – and be wary of how much debt you’re taking on. Financial leverage is a powerful advantage in the real estate world, but it’s also possible to overleverage yourself.
Diversify Your Real Estate Portfolio
It’s common advice to diversify your investment portfolio to hedge against risk – and for good reason. In the real estate world, there are several ways you can build your portfolio to minimize your exposure to risk.
· Single-family vs. multi-family properties.
Single-family and multi-family properties tend to have different strengths and weaknesses. For example, multi-family properties are less vulnerable to revenue loss due to vacancies, while single-family properties are easier to manage. As your portfolio grows, it may be advantageous to seek holdings in both.
· Different cities and neighborhoods.
You can also diversify your portfolio simply by investing in properties in different cities and neighborhoods. Real estate markets vary wildly from area to area, so being exposed to many different areas at once can help you balance the volatility you may otherwise face.
· Residential vs. commercial properties.
Commercial properties tend to be more expensive, but they also have the potential to be more profitable. Also, commercial and residential property values tend to grow at different rates; it may be in your best interest to have holdings in both.
· REITs.
Real estate investment trusts (REITs) allow you to invest in many different properties at once, albeit indirectly. You’ll be trusting a real estate investing company to do the work for you, but you’ll get exposed to a wide range of different properties simultaneously.
Diversify the Rest of Your Portfolio
Additionally, you shouldn’t be investing all your money in real estate – even if you have a lot of experience and a lot of confidence in the space. If you want a truly balanced portfolio, it’s important to put at least some of your money into other assets, such as stocks, bonds, and even precious metals like gold or silver.
Every individual investor is going to have a unique set of goals and a unique tolerance for risk. While the advice in this article is meant to reduce your risk while real estate investing, reducing risk may not be your biggest priority – or you may have other novel ways to reduce it.
Make sure you make all your investment decisions carefully, consulting a wide variety of sources and keeping your own personal priorities in mind.
Laila Azzahra is a professional writer and blogger that loves to write about technology, business, entertainment, science, and health.