Managing the risk of your properties

Investor Mindset
10yFollow

Managing the risk of your properties

Peter TverdovBusiness Member
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes

I always enjoy reading the passion, creativity and energy a lot of people have on here but I don't often read about the downside risk that is very real in REI. I was just curious - how many people do a risk management analysis of their properties or living situation? Can you handle a vacancy? How many months? What if you lose your job? What if your wife loses her job? What if rent prices drop? Etc. I think this is very important for people to do, to avoid being over leveraged and caught naked when the storm comes (and it always comes).

I recently did an analysis of what I own right now and I'm happy to see the overall value of my portfolio in the 70s percentage wise when it comes to LTV (which is good for me considering what I put down) and I am also happy to see what my net operating income would look like if rents dropped 10%, 20%, 30% or 40% so I know where my "uh oh" line will be.

In my experience when bubbles pop or corrections happen, they can happen hard and if you're not prepared or living in a fantasy land you could lose everything you worked hard for. I don't want that to happen personally (and I might not be conservative enough here), but just curious what other people do from a risk management perspective when it comes to their portfolio? 

[email protected]732-289-3823
1Reply
25 views

Most Popular Reply

Brian Pleshek
Investor · Hamilton, OH · Member since 2016 · 272 posts · 77 votes
10y

I am a buy and hold investor in Cincinnati, Ohio.  I have no debts outside $35k on a mortgage on a rental.  My personal property is paid for.  Another rental is paid for.  Both were cash deals.  No cars, no credit cards, etc.  To manage risk you either have to have the cash reserves or have the income.  Whoever you borrow from to make your deal won't care that your tenant moved out.  And tenants will move out.  And they will leave your place trashed some times.  If you cannot afford to pay for it yourself either with personal cash flow or reserves, then you cannot afford a deal.  My personal risk tolerance won't allow it.  Now once you start having 3, 4, 5 or more properties, then it's possible that the cash flow from all of those might cover if one goes unrented.  But if you're one of these people who like to see $100/unit cashflow positive and you're dealing in duplexes, then you'll have to own a lot of properties to have the other ones cash flow the vacant one.  Personally, i'd like to have 3-6 months expenses per property in case of problems.  If you start having scores of properties, then you've got protection in numbers and can maybe cut back on that somewhat.

Brian

1Reply
See this reply in the discussion

4 Replies

Jump to latestLatest
  • Account Closed
    Baltimore, MD · Member since 2015 · 29 posts · 14 votes
    10y

    Buy and hold multifamily perspective here, and it all comes down to debt service coverage. Over-levering a property should be avoided unless you need the capital for another deal, and even in that case never over-lever your entire portfolio.

    0Reply
  • Account Closed
    Rental Property Investor · Orlando, FL · Member since 2016 · 463 posts · 220 votes
    10y

    Thank you for starting this thread and discussing what seems to,me, too, to be glossed over in all the gushing over real estate investment. I am a novice investor and a naturally cautious (though not entirely risk averse) person. I have scoured the site looking for cautionary tales or advice on what risks to avoid and how, and there is precious little. There is a natural selection bias on the site in that those who got burnt are not here to tell their stories, so all we hear are the success stories (which are helpful and inspiring, but would ideally be balanced by failures).

    0Reply
  • Brian Pleshek
    Investor · Hamilton, OH · Member since 2016 · 272 posts · 77 votes
    10y

    I am a buy and hold investor in Cincinnati, Ohio.  I have no debts outside $35k on a mortgage on a rental.  My personal property is paid for.  Another rental is paid for.  Both were cash deals.  No cars, no credit cards, etc.  To manage risk you either have to have the cash reserves or have the income.  Whoever you borrow from to make your deal won't care that your tenant moved out.  And tenants will move out.  And they will leave your place trashed some times.  If you cannot afford to pay for it yourself either with personal cash flow or reserves, then you cannot afford a deal.  My personal risk tolerance won't allow it.  Now once you start having 3, 4, 5 or more properties, then it's possible that the cash flow from all of those might cover if one goes unrented.  But if you're one of these people who like to see $100/unit cashflow positive and you're dealing in duplexes, then you'll have to own a lot of properties to have the other ones cash flow the vacant one.  Personally, i'd like to have 3-6 months expenses per property in case of problems.  If you start having scores of properties, then you've got protection in numbers and can maybe cut back on that somewhat.

    Brian

    1Reply
  • Steven Loveless
    Real Estate Investor · Sachse, TX · Member since 2016 · 69 posts · 60 votes
    9y

    I am just getting started (just closed first property) but have been planning and analyzing for several years. I'm a conservative person as far as risk goes, I think most folks on this site are way more aggressive. A lot of it depends on how much you have to lose though - if you have stable high income, a young family, an already significant net worth, etc. than you will probably be more risk adverse. If you have nothing, you have nothing to lose so will probably be very aggressive. I look at it from two perspectives, both of which must pass for me to invest.

    1. On a personal finance level can I cover the risk? For a home - if it gets trashed, do I have cash reserves to rehab it? Can I cover 1 year of expenses with no income? If I lose my job, can I still cover it without fire-saling assets? These are all questions that take into account my entire financial picture. I rely on cash, income, etc. to maintain the property in one of these cases.

    2. On an investment level - if rents drop by 25% for several years will it still achieve what I want it to? You also have to take into account that if there is a crash that stocks, bonds, etc. will likely suffer as well (unless you are clever enough to see it coming and short the hell out of it). So I don't look at absolute return in these cases, more of "will this investment perform equal to or better than a total market type fund in a negative cycle"? I'm buy and hold long term, so I don't care about if the retail market tanks - as long as those rents keep coming in, so I underwrite purely from a rent perspective.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free