How To Be Daring, Yet Conservative In A Hot Real Estate Market
Investors in any asset class are generally risk averse. Rarely, if ever, do investors look for risky opportunities in which to invest their hard-earned money. However, it’s also important to understand that no investment class comes without risks. As an investor, it’s largely up to you to determine which risks are worth taking and which ones should best be avoided. For instance, real estate, while one of the most secure asset classes that investors rely on today, does require investors to take a certain amount of risk. Today, due to a variety of factors, the real estate market is as hot as it has been in several years. Understanding how to be bold while still operating conservatively is an important part of achieving optimal success as a real estate investor.
Do I Really Need to Take Risks?
As an investor, you understand that your money is the most valuable resource that you have. After all, no matter how much industry knowledge you possess, it serves no purpose if you don’t have the necessary funds to put that knowledge to work. However, if you’re going to achieve optimal investment success, it’s important that you understand that there will be times where you need to take risks. No investment opportunity is free of risk. No matter how great the neighborhood that you’re considering purchasing a rental property is, and no matter how many renters live in an area that you’re considering purchasing an apartment complex in, there are risks associated with any investment. What does this mean for you as an investor? It means that you will have to take risks. However, you can take calculated risks that put you in a position to succeed.
Evaluate Deals Conservatively
One of the most effective ways to strike the balance between risk-taking and being conservative with your money is to evaluate deals conservatively. No matter how long you’ve been investing, you’ve probably heard it said that it something sounds too good to be true, it probably is. Applying principles like that to the world of real estate investing is a great way to ensure that you’re taking a conservative approach to an industry that requires you to take some risks.
The formulas that investors rely on to project the short and long-term viability of any given investment require you to plug in some figures from the past while also forecasting some figures. Striking the balance between being bold and being conservative in today’s hot market means that you should rely on lower-end projections to calculate the subject property’s earning potential. Obviously, if the subject property exceeds your projections, that’s a great thing. However, when you look at the bare minimum production from a property, you can better determine if there is a space for it in your portfolio.
Putting It All Together
When you’re investing in a real estate market as hot as the one that the United States presently finds itself in, it’s easy to assume that nothing can go wrong. With interest rates at all-time lows and most regions proving to be very favorable to sellers, it’s easy to believe that certain investments are risk-free. Ultimately, that’s never the case.
Being bold while operating conservatively may sound like an oxymoron, but it’s not. The conservative aspect of your investing generally comes during the evaluation phase of the deal. Before you invest in any property, you should certainly do your due diligence on it. Due diligence includes looking at past figures while forecasting future potential earnings. In that phase, you should certainly take a conservative approach. For instance, if an apartment complex has never produced a rent growth percentage of 6% or higher, don’t assume that it’s going to under your ownership. Instead, take a conservative approach. If your investment property reaches those higher levels, you’ve certainly stumbled upon a good piece of property. However, if it doesn’t, you won’t be left holding the bag on a property that never lived up to potentially unrealistic expectations.
Finding success in the world of real estate investing requires you to be willing to take certain risks. However, being bold doesn’t equate to being careless. Understanding how to strike the balance means that you are in a position to grow your portfolio while creating a level of generational wealth that many investors only dream of.