More often than not, what stops aspiring new real estate investors from getting their first deal is simply fear. So, how can those who are hesitant to invest conquer their fear of risk in order to get started on their investing journey?
During a recent episode of the BiggerPockets Podcast (episode #368), guest Palak Shah explained that taking risks is actually a skill that can be practiced and learned. In the clip below, Palak shares how she pushed herself out of her comfort zone.
How to Become a Risk-Taker
Here’s Palak on learning to take risks:
“I always assumed that people are born with these abilities, but taking risks is a skill that can be developed. I probably read it somewhere, but I call it flexing my risk-taking muscle.
“And in the beginning, I had to learn to be comfortable taking risks and assigning numbers to it, so that I got more and more comfortable. And then, in the last few years, I have understood that it’s a skill set. You can develop it. So, just start by building a framework around it.”
Following up, I asked Palak what advice she would give to anyone else who wants to improve in this area: What are some things that you did that helped you build that risk-taking muscle?
“What I would do is I would make a spreadsheet and in the first column put all of the risks involved in a deal. In the beginning, for example, thinking about my very first BRRRR deal, there were so many risks that come to mind.
“And as a new investor, what one does is you just clump all of these together and put them in a big ‘risk pot.’ And then it just seems like a really massive, daunting task. But they can be broken down.
“So I would make a spreadsheet and build the first column as all of the risks. And for example, in a BRRRR deal, maybe it’s: ‘What if I go over my construction numbers? Or what if the property doesn’t appraise for what I wanted it to appraise for at the end? What if I don’t get the rent that I want?’
“List all of them, and then assign a dollar value to it that would be the worst case scenario.
“So for me, for example, in construction, to mitigate that risk, we started putting 15 percent extra toward contingencies. So we say, OK, this is a risk. We can go over on construction. So let’s start putting 15 percent and that mitigates that one risk.
“Moving onto the next one, then you say, OK, what if it doesn’t appraise for what I wanted it to appraise for? And having been in corporate and being a dabbler investor before, I know that a lot of people put 25 percent down and buy properties. So if I’m left with 5 percent in the deal, it’s still better than putting 25 percent down and buying a property.
“If I don’t get the rent that I want, do I still want to invest in this property, knowing that the worst case scenario, rent is $100 less than what I’m expecting it to be. So assign dollar values to them, and then decide if it’s still worth pursuing it.
“And then, say the worst case scenario happens. Am I willing to spend that money to learn what I’m going to learn from this deal?”
Palak’s mindset surrounding risk is a lot like something Tim Ferriss talked about in The 4-Hour Workweek. He calls it something like the “worst case scenario analysis,” and it’s the idea of taking all those risky points that people just internally feel anxious about, defining them, and then figuring out what they can do to mitigate that risk right now.
And when you define those risks, when you put them on paper or on a computer screen, somehow they’re no longer as scary as they once were. Such a smart move.
To watch or listen to the rest of Palak’s podcast interview, visit biggerpockets.com/show368.
If you aren’t a natural born risk-taker, what are you doing to conquer your fears?
Share your advice below!