Risk Management
Management and evaluation of risk is a major part of any successful real estate investment strategy. Risk occurs in many different ways at every stage of the investment process. Below is a tabulation of some common risks and typical risk mitigation strategies used by real estate investors.
Risk | Mitigation Strategy |
---|---|
Fraudulent sale | Verify ownership, purchase title insurance |
Adverse possession | Obtain a boundary survey from a licensed surveyor |
Environmental contamination | Obtain environmental survey, test for contaminants (lead paint, asbestos, soil contaminants, etc.) |
Building component or system failure | Complete full inspection prior to purchase, perform regular maintenance |
Overpayment at purchase | Obtain third-party appraisals and perform discounted cash flow analysis as part of the investment pro forma, do not rely on capital appreciation as the primary source of gain for the investment |
Cash shortfall | Maintain sufficient liquid or cash reserves to cover costs and debt service for a period of time, |
Economic downturn | Purchase properties with distinctive features in desirable locations to stand out from competition, control cost structure, have tenants sign long term leases |
Tenant destruction of property | Screen potential tenants carefully, hire experienced property managers |
Underestimation of risk | Carefully analyze financial performance using conservative assumptions, ensure that the property can generate enough cash flow to support itself |
Market Decline | Purchase properties based on a conservative approach that the market might decline and rental income may also decrease |
Fire, flood, personal injury | Insurance policy on the property |
Tax Planning | Plan purchases and sales around an exit strategy to save taxes. |
Read more about this topic: Real Estate Investing
Famous quotes containing the words risk and/or management:
“When a man leaves his mistress, he runs the risk of being betrayed two or three times daily.”
—Stendhal [Marie Henri Beyle] (17831842)
“People have described me as a management bishop but I say to my critics, Jesus was a management expert too.”
—George Carey (b. 1935)