This is a topic I could talk about for days! After you’ve worked through our previous steps for building your life by design, it’s time to start making decisions about how you will invest. People find different real estate investment options attractive for different reasons. It’s important to find the opportunity that best fits your plan and your vision. Some of the most common investment opportunities include:
Buying a duplex where one side pays for the other side
Investing in single-family homes, because in a good market you can easily sell
Leasing vacant land or even mobile home parks to experience less responsibility
Purchasing commercial properties for tenant versatility
Buying an apartment building where it’s easier to make sure you won’t end up cash poor thanks to having multiple tenants
Once you’ve made a decision about the type of real estate investment that’s right for you, it’s time to talk about calculated risk.
Calculated Risk in Real Estate Investment
Calculated risk refers to an undertaking that has a chance of failure, but the probability of failure is lessened by preemptively and thoughtfully assessing the chances of failure. It is often a risk that you strongly consider taking, because the likelihood of the end result being successful outweighs the potential measured risks.
No investment opportunity comes without risk. In fact, I would argue that very little of the decisions we make in life come without risk! But I would also argue that there is senseless risk and calculated risk, and that calculated risk is often worth taking. It can have a massive payout in the end, and if you’ve done your research you can minimize risk as much as possible.
Here is the risk assessment checklist that I go through before I take the plunge on any real estate opportunity. I like to carefully consider each item, going so far as to personally visit each area, talk to neighbors, request multiple inspections and crunch the numbers with a financial advisor. Do your research! Once you’ve got a “green light” on each item, you can move into the next phase of the investment process with peace of mind that you’ve done a thorough risk assessment, and with confidence that you’re likely to see big gains from this opportunity.
1. Is this property in a neighborhood that people desire? I like to look at opportunity zones. Ask yourself questions like: can I get a tax credit for purchasing here? Are people moving to this area, and can I get ahead of the cost of living that comes with supply and demand? Is growth happening around the property and neighborhood? Is it likely that I can resell easily?
2. If the market dropped, could I make my payments? I’m not comfortable putting myself in a position where I couldn’t make payments on a property if the market dropped dramatically. I want to know that the investment could somehow pay for itself should a worst-case scenario take place.
3. Can I grow equity? I don’t typically go for the nicest house on the block. Buying something more affordable and then doing renovations, making it better or adding units is a fantastic way to make a more substantial profit.
4. Will I want to own it in 7-10 years? Markets are cyclical and usually work in a 7-year trend. I often ask myself whether I would want to hold onto this property in 7 years. If it’s already old enough that I likely would not want to own it, then it might not be the right investment for me.
5. If I spend the money, will it put me in financial hardship? I’m OK with risk! I’m OK with making sacrifices in order to take advantage of a good opportunity. But I’m not OK with taking a risk that could ruin my life. If an opportunity could take me down should things change or the market crash, then it’s not the right risk for me.
6. What does somebody else think about this deal? It can be easy to look at a deal from behind rose-tinted glasses when you fall in love with a property. That’s why I think it’s important to get an outsider's perspective. Have somebody else blindly see the property, have them review the paperwork, and don’t be afraid of honest feedback.
7. What don’t I know in regard to this property? I think about all of the other questions I’m missing, and I think about them often. Go through your checklist daily, for several days. If you continue to feel good about each answer, then that’s a great sign about your opportunity.
Final Thoughts About Making Investment Decisions Based On Calculated Risk
One thing I always tell my clients is to not be afraid to leave opportunity on the table. There will be more - lots more! Especially when you’re getting out there and creating opportunity for yourself. Not every opportunity is one that’s going to get you to your goals, and what’s right for one investor isn’t necessarily right for another. Always stay true to your vision, and use the risk assessment checklist to help you determine the right opportunities for you.
If you would like to learn more about growing your wealth through real estate investing, I would love to help! Feel free to connect with me on Clubhouse, sign up for my informative Get Some Assets newsletter, take my FREE real estate investing course, or reach out to me directly!