Understanding Risk Management in Real Estate Investing

Real estate has proven to be one of the most sustainable long-term investments you can make. Savvy investors can buy, sell and hold properties of different types: residential, commercial, industrial or raw land. The right moves can net you exceptional gains. Real estate also tends to provide a nice tax shelter for those who have the proper business structure and tax plan in place.

However, real estate can present plenty of risks—just like any other type of investment. It is not a fool-proof strategy, especially if you are new to real estate investing. You must treat your real estate holdings as a business. To this end, you must understand the importance of risk management as it pertains to any business holder.

What is Risk Management?

Risk management is the process of identifying, analyzing and managing different aspects of a business or investment holding. Important factors include financial, legal, strategic and security risks that can directly affect your capital earnings, expenses and losses. Below are some of the most important risk management factors to consider when investing in real estate.

Market Conditions

Any good real estate investor must understand how the real estate market works, particularly when it comes to the particular type of real estate in which you are investing. The commercial real estate market will be very different from residential. And, within each major category there are many subcategories. For example, residential real estate investment can include house flipping, wholesales, single-family rentals, multi-family rental properties, and short-term rentals. Study the ebbs and flows of the real estate market and know as much as you can before investing. This is one way to help mitigate risk and prepare for changing market conditions.

Diversification

Diversification is crucial for any investor. Having having multiple properties and/or different types of investments in your portfolio helps protect you and all your holdings. If one investment category goes bad, you have others to help keep you balanced. It’s the classic tale of “not putting too many eggs in one basket.” This is why many seasoned real estate investors will hold different types of properties in multiple geographic areas. You might have a commercial property in California and a multi-family apartment complex in Arizona. This diversification will help you in the long run.

Property Analysis

Having a full understanding of the real estate market and current/future conditions will make a big difference. Then, you must also perform detailed property analytics for each investment you are considering (or already own). Understand the expenses involved in the investment, potential profit margins, rent prices, property values, etc. Be very careful before purchasing any property. This is a great way to help minimize risk with that particular investment.

Good Partnerships

Very few real estate investors are doing everything on their own. As your real estate investment business grows, so should your network of resources and professional partners. We’re talking about legal counsel, financial advisement, trustworthy contractors, tax planners, real estate agents, property management companies, and others who will help you make the most of your investment opportunities.

Long-Term Planning

Any successful business plan requires a long-term outlook. Even if you are doing quick property flips, future planning is critical for proper risk management. This will enable you to make both short-term and long-term decisions that will positively affect your real estate investment portfolio.

For help with your real estate investment planning and risk management, count on the team at Illumination Wealth. Our experienced advisors can help with many key aspects as you take your real estate investing to the next level. Whether you own one rental property or hundreds of units, we can put you on the road to financial independence. Contact us today to get started.