How to manage risk 8 posts by 6 users

Posted: 05/20/2008 at 02:00PM

I’m an investor in the works. I am now in a situation where I fear vacancies in my properties to the point of not being able to cover mortgage. I have 4 rental units which I do very well with and so far can manage, but I don’t know if I keep growing if I’ll be in too deep and over my head to manage risk. My current properties cash flow about $150 a month after all expenses which I think is OK. But I was wondering how more experienced investors manage this risk? How do I pass this fear and keep growing? Please advice.

Posted: 05/20/2008 at 03:57PM

As Tim said, build your reserves.

Ask yourself how long you could continue if all of your properties were vacant. What you most want to avoid are 1) foreclosure, 2) selling your properties at distressed prices, and 3) having to rent to anyone with a pulse just to get cash flow.

In personal finance, it is a general rule that one should bank at least six months worth of expenses in case one lost one's job. Of course, that is a personal call.

Personally, I like to sleep at night. It never seems to amaze me (or aggravate me) that my properties always seem to stay vacant longer than I anticipate, or that those properties always seem to cost more to recondition once a tenant leaves.

Good luck.

Posted: 05/20/2008 at 06:26PM

In my opinion, you are just about at the point of maximum risk! When you have 4 rentals, you are in a position where all units going vacant at the same time (or another major anomaly occurring) is certainly possible and those 4 empty units could be enough to do serious financial damage to you. As your portfolio grows, your risk will diminish because the chance of an anomaly (like a 100% vacancy rate) affecting you greatly decreases.

Think of it this way. If you have one rental and it goes vacant, your vacancy rate is 100%, yet you can probably afford to cover this vacancy expense out of personal money for a significant period of time. The vacancy factor probably does not provide a significant risk to your financial health. When you have four rentals, it is possible that through bad luck, they could all go vacant at the same time, which could result in significant losses that could break many new investors in a short period of time. As your portfolio grows to 20, 30, 40, 50, or 100 rentals, your vacancy rate will approach the vacancy rate for your market and the chance of having vacancies that will wipe out your cash flow greatly decreases.

With only 4 rentals, having one vacant is a big deal. With dozens of rentals, I ALWAYS have vacancies and they are just part of the business. Who has the greater risk - an investor with 4 rentals or one with 100?

Good Luck,

Mike

Posted: 05/21/2008 at 07:14AM

All_cash, the cash flow is $150 (average) per unit and this is after mortgage, taxes, insurance and all. My four rental units are all houses, from one bedroom to 3 bedrooms. I paid for them from $40000 to $65000 . I don’t think the cashflow is great….just OK. My goal is to pay them off as soon as possible, but it’s harder then I thought. I’m happy to say though that one of them ($40000 one) it’s paid off. I really need to work on my reserves ! Thanks for your input. It helps !