Every investment can be thought of in terms of a simple gamble: You’re going to put $X on the table and play a game, and you’re going to walk away with $Y. If $Y is greater than $X plus expenses, you win! If not, you lose.
In almost every form of media available to us, we see risk-takers being lauded as the “movers and shakers” of the world. People who achieve impossible ambitions, who stand up to overwhelming authority or power, or who survive insane circumstances through daring and skill — these are the people we’ve been taught to exalt.
But property investment isn’t a heroic endeavor, and this isn’t a movie: You’d better have a really solid understanding of risk before you get in on this game, because if you lose, it’s your own lunch (and that of your family) that you’re risking.
Risk is THE Factor
There’s a lot of literature out there talking about the factors that make up a successful property investor (or investment) — but far too many of those books (and seminars and websites) don’t ever really delve deeply into calculating risk. They just say “avoid these things,” as though a short list of no-nos will stand in for a complete risk analysis. Your personal tolerance for risk (or, as the case may be, intolerance of low reward) is THE single most important factor in any real estate investment.
Determining Your Risk Profile
A person’s risk profile is composed of four elements:
- Risk Tolerance
- Risk Appetite
- Time Commitment
- Monetary Goal
Risk tolerance varies from “none” (you can barely afford to invest in the first place, and a loss would directly affect your lifestyle) to “extreme” (you have enough disposable income that you have trouble deciding what to do with it). Most people fall around the “low” category — they could manage if they suddenly lost a few thousand dollars, but that’s about it. In general, you shouldn’t consider real estate as a viable form of investment unless your risk tolerance is at least on the upper edge of “medium.”
Risk appetite varies from “none” (you don’t find the prospect of risking money to be in any way exciting) to “YOLO” (you find nothing more engaging than not knowing that you’ll have food or a house at the end of the evening). Again, most people fall into the “low” category. Real estate investment can appeal to any flavor of risk appetite except “none.” If you want low risk, wait and watch until a complete no-brainer shows up, snap it up, and be done. If you want “YOLO” risk, buy everything and pray.
Time commitment varies from “single parent of three with a full time job” — I mean, “none” — to “bored gourdless.” This is where real estate investing can get really hairy. It’s totally viable for one person to single-handedly landlord for one house while they hold down a full-time job and raise kids. It’s totally viable for a person with literally nothing else to do to single-handedly manage five, maybe six houses — poorly. But if you want to do more than that — even just one house more than that — you absolutely need a property manager. If you want to be a full-time property manager (that is to say, you want to have time and energy to commit to studying the market and finding great properties to invest in), it’s almost impossible without a great property manager.
Monetary goal breaks down into two essential types: You either want to invest because you’re setting up a cash flow, or you want to invest because you’re setting up a nest egg. Both kinds of investment are equally important, and real estate investing can lend itself to either one when set up appropriately.
If you’re interested in investing, then, you need to sit back and assess your risk profile, and you need to decide if you have:
- Risk tolerance enough to put your entire investment down on the roll of a die. One you lose it all, five and six you win 170% back. If you’re not willing to commit to that level of risk, choose a more stable investment.
- Risk appetite enough that you’ll be happy to have your money out there working for you rather than sitting safely at home growing and sleeping on your feet at night.
- Time commitment enough to either do the job yourself, or invest the time and effort required to find a property manager you trust and can work with.
If you can do that, and you can research how to set up your investment to achieve your monetary goal as well, then welcome to the world of real estate investing! Pull up a chair, grab a drink, and wait for your turn with the dice.
Investors: How did you find the best real estate investment for your risk profile?
Let me know with a comment!