REI comes with massive profit potential—but of course, lots of risk, too. What are the best ways to protect your initial investment and increase profit?
Real estate investing is inherently risky, no matter what assets you have and which strategy you use. The key to successful investment doesn’t necessarily lie in whether or not it involves risk, but what you do with the risk. Unwise investors risk everything they have on a bet, while wise investors avoid putting themselves in a situation where they could lose everything.
But where should you focus your attention on reducing risk and gaining the most momentum? There are eight areas I’ve found to be the most beneficial for investors at any stage of their business. Let’s dive in.
1. Ask Simple Questions First
One of the best things you can do to mitigate risk with your investments is to perform your own simple risk analysis of the property. Ask yourself the following fundamental questions about the property:
Risk Factors You Need to Know Before Making a Real Estate Purchase
- Is the property ANYTHING other than a single-family residential/townhouse/condo property?
- Is the property a manufactured or mobile home?
- Will the property be occupied at closing?
- Is the property a cabin, vacation home, or other recreational property?
- Does the property have SIGNIFICANT mold issues (with a cost-to-cure greater than $5k)?
- Has the property had ANY fire damage (with a cost-to-cure greater than $5k)?
- Is the property less than 900 square feet?
- Are you adding to the property footprint or adding new exterior walls?
- Does the property have ANY foundation problems or roof truss problems (with a cost-to-cure greater than $5k)?
Layered Risk Factors You Should Consider
- Is the property within 100 miles of the coast or a high-risk flood plain?
- Has the property been vandalized?
- Is the property in a high-crime area?
- Is the property in a high-rental neighborhood?
- Are the average days on the market for the neighborhood 120 days or longer?
- Is the property near commercial buildings, active railroad tracks, or a major street?
- Is there more than one boarded-up home in the neighborhood within a 1/4 mile?
These questions will determine the overall risk factor of your deal. If you can answer yes to any of these questions, you may want to rethink whether this is the right deal for your business.
2. Diversify Your Portfolio with Different Types of Investments
Diversifying your investment portfolio is a fantastic way to ensure your business has consistent revenue streams that aren’t severely affected by market turns. We highly recommend starting your investments with wholesale deals. Wholesaling is the lowest risk and is an excellent way to invest in real estate without needing a ton of money.
Then, you can take a portion of the profit of the wholesale deal and invest in a fix and flip property. When you’re ready to take on, even more, we recommend you start flipping multiple properties at once. In addition, consider adding a few rental properties that bring in regular, steady income. Soon enough, you’ll be a real estate tycoon with a diversified portfolio that keeps your business afloat no matter the circumstances.
3. Invest in Real Estate Across the Country
When you first start out doing fix & flips, it’s a wise move to stay local so that you’re 100% involved in every step of the flipping process. You can negotiate with sellers face-to-face, oversee the rehab progress and execute a lot of the marketing yourself in local areas.
Once you get more comfortable and begin generating a steadier revenue, you can spread your investments out to other hot markets. By branching out of your area, you’ll be able to try out new markets that might have better returns on investment than your own. Investing in different regions also allows you to work in states that have lower taxes or better small business initiatives like local grants for neighborhood improvements that lower your bottom line and make it easier to turn a profit.
To give you an idea of just how diverse markets are around the United States, here are the top five cities for fix & flips in 2021:
|City||Average ROI on Real Estate Investment (2021)|
Are you able to earn a 128.12% return in your town? If not, it might be a good idea to plan for expansion in 2022 and beyond. Remember to go slowly, though, since you’ll be giving up a lot of the oversight that made you successful before.
4. Invest in Your Education
You may have thought you were done with school years ago, but stopping your education is a terrible investment strategy. To give you an idea of how much money you’re leaving on the table by not putting more effort into your education, here’s how the numbers add up for the 400 wealthiest people in the United States and the amount of education they have:
|Level of Education||Number of Richest Americans (out of top 400 billionaires)|
|High School Degree||27|
Look, it’s true that we’ve got uber-rich people in the US who never received their bachelor’s degree like Bill Gates and Mark Zuckerburg. They, however, are the exception to the rule and shouldn’t be used as an excuse not to learn more about anything and everything you can.
Keep in mind that I’m not necessarily advocating you go to night school to get that MBA, but you should make some kind of effort to learn more about any subject that makes you a better real estate investor. Learn basic carpentry or plumbing, try taking a few bookkeeping classes, read up on being a more productive entrepreneur, sign up for an REI-based networking group, hire a coach, whatever you want! Don’t risk your business by pretending you know it all; learn what you need to know to mitigate your risk in an already risky industry.
5. Network With Experienced Investors
In this industry, trying to go at it alone is a fool’s errand. Too many new investors think they need to steer clear of their competitors when that couldn’t be further from the truth. In my experience, real estate investors are some of the most open, helpful entrepreneurs out there, and leaving that resource untapped increases your risk exponentially.
Your more experienced competitors will know the market much better than you and may have access to tips or ideas about handling things from zoning issues to who the fastest property Inspector is and what they typically charge.
Will you come across shady competitors who don’t have your best interests at heart? Yeah, probably. But I genuinely believe and have seen that those people are both the minority and don’t last very long in the industry. Instead of getting intimidated by the other investors out there, get friendly. Head to a local networking group, email people, set up a coffee chat, or join an online investor community. You’ll be surprised at what you learn and how your costs can be drastically reduced!
Also, one other tip: Pay it forward the more successful you become. There’s enough inventory out there for everyone, and your reputation as a trustworthy, helpful investor will pay off dividends. Be generous with your time and experience when a newbie investor comes to you with a clammy handshake to nervously ask for a lead or help.
6. Create a Cache of Service Professionals
Ever wonder if you’re being taken for a ride with your general contractor? We’ve all been there. Instead of wondering every time whether or not you’re going to get the work you’ve paid for, start creating a Rolodex (do people still use Rolodexes?) of reliable service professionals that you can count on to give you good work at a fair price.
I typically keep a roster of at least three pros for dedicated categories like plumbing, general contracting, inspections, attorneys, and electrical. I like three because I get a fallback in case my top pick is unavailable, and then another fallback in case the original fallback is unreachable or goes out of business (it happens more than you’d like, believe me).
It’s taken me a few years to build out that “stable” of talented folks, so don’t feel like you’re in a vulnerable spot if you’ve only got one or two trusted pros. Having even one go-to that you can trust significantly reduces your level of desperation and lets you mitigate the risk you’d take by hiring an unknown in that industry.
7. Stay Up to Date with Market Trends
Do you know the easiest thing to do to avoid risk in real estate? Know what’s coming. That’s it! How do you know what’s coming? You pay attention and actively make time to stay up-to-date.
I’m not only talking about market fluctuations, although that’s likely the most significant factor you’ll need to pay attention to. I’m also talking about tech and how it relates to the needs of your end-users, like the people buying your fix & flip or the new tenants you’re looking to attract. Do you know how important clean, renewable energy is as a selling point for Millennials and Gen-Z? It would be good to know, then, that solar panels have dropped 89% in price since 2010.
The same goes for rental properties. Your tenants will skew more toward the younger generations that haven’t owned a checkbook in years, if ever. Are you going to attract them to your rental properties if you’re not offering some kind of e-payment system? How much more willing would they be to work with you if you had something simple like Venmo?
The less willing you are to lean into current trends, the higher risk you’ll take in finding customers who want what you’re selling. Keep abreast of what’s going on in your area, how demographics are changing (or aren’t changing), and what tiny bits of info give you a competitive edge over other investors.
8. Hoard Cash and Be Best friends with Your Lenders
Not having access to critical resources when you need them can get you into sticky situations quickly. While it’s true that you’ve got to spend money to make money, you don’t need to spend all the money. Keep a healthy rainy day fund for your business so that if anything unexpected pops up where you’re out of cash and need to pay contractors or make payroll that you’re not scrambling for money.
In addition, keeping a good relationship with your lenders will go a long way to reducing your processing time and might even get you better rates. That doesn’t mean you need to send them a Christmas card or anything, but staying in touch is always a good idea for nurturing professional relationships. Let them know the success you’ve had thanks to their loans or how one of their employees helped you with some aspect of your business. Not only will it make them happy to have new testimonials, but it’s a great way to show your business is thriving and that you’re a reliable client to have. That way, when you need quick cash from a hard money loan, your lender will have your info top of mind instead of having to hunt to see who you are and what they’ve done with you before.
I hope these steps help you gain greater knowledge with risk mitigation and give you the confidence to put your best investing foot forward. Use any of these eight ideas to help lower your risk, and you’ll be well on your way towards becoming a successful real estate investor.