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BlogArrowPersonal DevelopmentArrow3 Ways to Deal With Real Estate Risk Without Letting it Paralyze You
Personal Development

3 Ways to Deal With Real Estate Risk Without Letting it Paralyze You

Michael Blank
Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
handle_risk_real_estate

As real estate investors, we recognize that we need to take risk in order to reap any rewards. But how should you go about dealing with this risk? What’s too risky, what’s an educated risk, and when are we not taking enough risk? In this article I give you my thoughts on how I deal with risk.

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I approach risk in three ways:

3 Ways to Deal With Real Estate Risk Without Letting it Paralyze You

#1: Ignorance is Bliss

I have to be honest: I approach many new ventures from a perspective of pure and utter ignorance. I just don’t know what I don’t know. Sure, I educate myself, ask questions and consult past experience. But if I were fully aware upfront of what COULD happen, I might never have started in the first place.

If I had known I could be sued by a homeowner three years after I had sold the house to her, maybe I wouldn’t have flipped houses.

Related: What a Failed Hedge Fund Can Teach Us About Risk in Real Estate

If I had known that a single tenant could bankrupt the entire apartment building by incessantly calling the authorities and suing me, perhaps I would have never started with apartment buildings.

If I had known that owning restaurants could result in significant losses, I would have never gotten into restaurants.

My point is this: Sometimes ignorance is in fact bliss. If we knew of every possible risk that could happen, it might be so overwhelming that we would never start with anything.

The reality is, while these things DID happen and they WERE bad, the overall venture was decidedly positive, both in monetary terms and experience gained.

Sometimes ignorance is good because it keeps you moving forward.

#2: Manage the Risk

Of course, we try to manage the risk. When we ARE aware of a risk, we try to assess its probability and impact. We think about what we can do to decrease the odds of it happening in the first place. And we consider what we would do if it were to happen.

We put all of this together, and we decide to take a calculated and educated risk because we know we can’t avoid risk; we can only mitigate it.

There is certainly a science to managing risk. That’s why large companies have “Chief Risk Officers.” Their job is to quantify and assess risk.

The challenge is that very few deals are no-brainers. The vast majority of deals are somewhere in the gray zone: they’re likely to work, but there’s always some doubt.

“Is this a good idea or not? Should I move forward with this deal or not?”

I’ve come to the conclusion that assessing risk is more art than science. It’s really about gut-feel. Sure, you can put pen to paper, lay out scenarios. And you should. But at the end of the day, at least for me, it’s a gut-check.

It’s not about avoiding risk, it’s about managing it.

#3: Always Expand Your Comfort Zone

Risk is a funny thin, because it’s relative. What I might consider risky, you might find completely not risky. I might find a mobile home park investment risky, and that might be your specialty. I might only offer $1.5M for an apartment building, and the next guy buys it for $1.8M. Why? Many times it’s an owner who owns the building next door. He’s familiar with the area, the market, and has a local team in place. His perceived risk is lower than mine, and that’s why he pays more.

When I visited my first 12-unit property, I was overwhelmed. Sure, I had flipped a couple of dozen of houses up to this point, but this was giant 3-level brick building. I could feel my stomach tightening at the thought of owning it.

Ten days into my due diligence, my comfort zone must have expanded because not only was I no longer anxious, I wished it was a bigger building! I learned that it's the same amount of work to purchase a 12-unit as buying a building two or even three times that size.

Your bigger risk is someone else’s lesser risk.

And what you thought risky today, you might not consider nearly as risky as you did a year ago.

The reason is that some people have a bigger comfort zone than others. The lesson here is to constantly expand your comfort zone.

Related: 3 Types of Risks Real Estate Investors Regularly Take

I recommend that you consistently operate just outside your comfort zone. If you do, your risk tolerance will grow and grow and grow. Over time you will look back and wonder why you got so stressed about a particular deal or situation a couple of years ago.

Conclusion

As real estate investors, we need to take risks to have a shot at success. While a good defense may work well for a football team, it’s a good offense that is required by an entrepreneur. If you accept the fact that you might not be completely prepared, do your best to anticipate and manage the risk, and constantly expand your definition of risk, you will be amazed at how your investing career will continue to grow.

What do you do to manage risk without letting it paralyze you?

Share in the comments below!

By Michael Blank
Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
Read more
Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment building deals with a special focus on raising money. Through his investment company, he controls over $30MM in performing multifamily assets all over the United States and has raised over $8MM. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87MM. He’s the author of the best-selling book Financial Freedom With Real Estate Investing and the host of the popular Apartment Building Investing podcast Apartment Building Investing podcast.
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4 Replies
    Tyrone Maxwell Real Estate Agent from Baltimore, MD
    Replied almost 6 years ago
    Wonderful article about how to manage risk. I to have been paralyzed by risk and fear but have learned to trust the numbers and if it the numbers work than the deal probably will also.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 6 years ago
    Investing is all about the numbers, then followed closely by your gut-feel -;)

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    Chad Carson Investor from Clemson, SC
    Replied almost 6 years ago
    Hey Michael, I think this is a very helpful article. You describe really well the grayness of true day-to-day decision making as an entrepeneur. If we expect absolute certainty or risk removal, we’ll forever be paralyzed. For me it’s also helpful to make the distinction between when I’m wearing the entrepreneur or the investor hat. As entrepreneur I risk time and capital every day. I expect to lose on some, knowing I will make it up on the next 2 or 3 deals with incredible returns. I have to plow forward because I never know which deal will be the best one. And when it does go bad, I solve it as quickly as possible and move on. An investor, the person who puts up the majority of the capital for a venture (equity or debt) should have a little different mentality about risk. Losing 50% of principal is not acceptable. That is why gravitating towards risk avoidance is a hallmark of the best investors like Benjamin Graham and Warren Buffett. They will run from deals with too much uncertainty or risk of loss. I think we can play both roles, but I find it helpful to know which role I am playing at the time.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 6 years ago
    A good point, Chad – the distinction is important. In that regard, I was targeting my view towards risk more towards the entrepreneur. I would write the article a little differently for the passive investor (hmm, maybe I will -;) thanks for the comment!

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