With any strategy, profitability is at the forefront
The following article was written by Nate Zielinski (pictured) of RCN Capital.
With any investment strategy, profitability is at the forefront of every investor’s mind. However, many seasoned investors will tell you that managing and mitigating risk is just as important for a sustainable portfolio.
Real estate investment properties are no exception. Knowing strategies to minimize risk can be the difference between a successful investment career and substantial debt. Smart investment practices can never be reiterated enough when it comes to how investors are managing their money and what they are doing consistently to become a sharper investor. Here are three key practices to mitigate risk in the real estate investment space.
Securing investment partners
Especially early on in an investor’s career, teaming up with like-minded individuals that want to invest in real estate as a career as well can be a massive boost when it comes to mitigating risk. With investment partners, each party has less skin in the game and can afford to be a little more aggressive when trying to secure a property. Instead of taking a massive risk on the first investment property and potentially draining all available capital, having partners allows for investors to potentially start their portfolio with two or three properties rather than just one.
Investing partners can also find properties more easily due to more people being dedicated to tracking them down. Talking through real estate investment property opportunities with partners also allows for checks and balances to determine if this is the right deal for all parties involved. Granted, this can lead to some missed opportunities due to due diligence, but with the alternative being a potentially poor investment these growing pains with investment partners are worth avoiding that risk. Eventually, the goal is to each go separate ways and have individual investments, but having a team with common goals in the real estate investment space to kickstart a career is something every investor should consider.
Geographical diversity
Another integral part of mitigating risk when it comes to real estate investment properties is finding properties in various parts of the country. Piling on investments all in the same geographic region can be extremely risky especially if that area is susceptible to natural disasters.
Townhomes in Miami can be wiped away during hurricane season. Apartment buildings in the Midwest could potentially be damaged by a tornado. In terms of weather, there is risk across the country. This doesn’t mean investing in real estate is too risky, but rather spreading the investments across the country offers peace of mind to investors. This requires a little extra work from the investor to study up on markets across the country and be able to secure properties in different states, but again when talking about mitigating risk this is one of the best ways to go about it. It can lead to more experience for an investor, which in turn helps accelerate growth and improves loan terms as they progress in their career.
Another aspect of geographical diversity is to be able to follow the trends as a real estate investor. Every few years a new market dominates the headlines, and it seems to become the new “best place to live”. A few examples include cities such as Nashville, Austin, and Phoenix which have seen an uptick in popularity and investment activity within the last 5 years. Vacation homes are another viable option to consider for investors and states such as Florida (summer) and Colorado and Utah (winter) can lead to successful investments.
Information and education always mitigates risk
Investment partnerships and geographical diversification are both sound strategies, but nothing can replace seeking out information and education yourself as an investor. There are so many instances where these two pillars are vital for investors to be successful, one of which is certainly the aforementioned geographical trends in which some markets are just performing better than others.
Another crucial part of education and information is tracking property types that are performing the best in any given market as well as tracking the Federal Reserve and knowing about current market conditions.
Where are the current interest rates that are dictated by the Federal Reserve? Is the market trending up or down regarding a recession or inflation? What news outlet can give me the quickest most accurate information?
These are the types of questions investors need to ask themselves on a weekly basis. It is easy to fall behind or lose touch in a fast-moving industry so having information readily available and being consistent with finding it is important.
Taking the education aspect a step further, investors that understand their lenders’ guidelines and best practices can set themselves up for success more often than not. When submitting a file to a lender in the hopes to close a loan, investors that display preparation, organization, and attention to detail never go unnoticed by a loan officer. Taking the time to learn guidelines and put together complete files is what separates good and great investors and makes a significant difference in the long run.
Final thoughts
With these three practices, mitigating risk in real estate investments becomes a much less daunting task. Paralysis by analysis is a familiar phrase that can be applicable to real estate investing, but with the right strategies and preparation, any investor can avoid this potential roadblock.
There are certainly more strategies when it comes to mitigating risk, but these three practices in particular are easy enough to start implementing this month and into the rest of 2024.
