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. |
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