Real Estate Risk Management
is real estate risky? Yeah absolutely! Real estate especially done incorrectly is especially risky, which is why I believe you have to have a philosophy, a strategy and a system
Let’s address philosophy. Why am I in real estate? Well, because when I retire I want to have a pile of paid off homes that support me in retirement. There’s also a service component, I get to do things, I get to provide something that is really important for Americans that actually is part of the American dream; a place for them to live, and I get paid really well when I use this philosophy and strategy to make money providing something useful for them.
What, Strategy and Risk
Let’s talk about the what, strategy, and risk. There’s a few things that I do to really minimize my risk. The first one is I deal in single family homes because that’s the largest number of what Americans want.
I always buy below the median. The median in my area is $200,000. On my last 1000 deals my average purchase price was $137,000, that’s going to help mitigate the risk. I’m always looking for a particular equity play. I want to buy below market.
Now cash flow, if I secure really great cash flow then even if that home were to lose value although not very likely, guess what I still have every month? A cash flow to support me! Once you have the philosophy and the strategy you got to have a system. My system is all about team, together everyone accomplishes more. Part of my strategy is having a team of experts that at this point they just do it all for me.
How do you Manage Risks?
Turn your credit into an asset. If you negotiate a 10, 15, or 20% profit position on a home and let’s just say that particular home make $100,000 then just by having to use your credit that was just sitting there doing nothing. A few years from now when that home sells and you get a check for let’s say $15,000 or $20,000 now that is passive income!
That’s a sleep well at night account. Okay get it? Swans are really peaceful creatures. A sleep well at night account says if I bought a property, I want to have 6 to 12 months of mortgage money in the bank and if I do that I’m going to sleep better at night okay.
This really important. The reality is that a lot of things in real estate look good on paper but it’s not until 12 or 18 or 24 months later before you actually know and can compare to reality to what the vision of the property was before you get an idea. So I like my real estate to be commoditized. It’s always going to be three bedrooms, two baths, an entry-level and meeting a hundred other pieces of specific criteria, because I don’t like to fluctuate out of that because then I step into the unknown. So track record gives me a really known record of what it is I’m doing, what that does is it reduces the risk.
Everything that I do in real estate on the single-family homes it’s always short term, like 2,3,4,5 years. Why wouldn’t I want to hold a home for seven years? Well that’s when the really big re-investment comes. If I’d had three or four different renters in there, guess what, they may have trashed the place enough to the point that it’s time to dump $10,000/$15,000 in there.
Below the Median
There are many different types of risk in real estate but one of them is what happens when something outside my control happens? Two big things; having the wrong renter, and if the market turns on a dime and does something you don’t like.
Well if you’re insulated below the median, like on my last thousand houses, my average purchase price has been $137,000; the national median is $200,000 so I’m 30% below the median. And that’s why my company and my real estate portfolio were growing leaps and bounds during this last major downfall because of this important strategy piece. So these are the four things that I would recommend you take a look at when it comes to ultimately mitigating your risk in real estate.
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