Limiting Your Risk Investing In Real Estate
The following article was submitted to us for publication. While this is not a strategy that I recommend for limiting your risk, it is worthwhile to consider the underlying message of prudence when investing your money. Before investing in any real estate deal, we strongly recommend doing a thorough, conservative analysis of it.
We all know that every investment deal is a risk. When you buy a property, you may have a very good idea of how to flip it at a great profit. But if you don’t acknowledge that there are risks associated with your great prospective investment deal, you are just pulling the wool over your own eyes.
Many investors put all of their money into a great-looking deal, cross their fingers, work every angle they can, and then hope to walk away with a tidy profit. And many of them do successfully make a profit in this way, at least for the short term. But if you think about it, putting all of your money into each deal that you do is a sure path to ruin. Even if you have a 95% chance to make money, eventually that 5% eventuality will hit you, and then you’re watching all of your dreams go down the drain.
No financial expert in their right mind would tell you to sink all of your savings into a single stock, no matter how much faith you have in the deal. So why do you think you should put all of your investment dollars into a single property? The truth is, many beginning or casual investors feel like they don’t have the money to spread their risk around. But, of course, as my Great Uncle Sylvester used to say, “If you can’t afford to buy six houses, you definitely can’t afford to buy one house.”
The truth is, you can manage that risk by diversifying, even if you don’t have a lot of capital to work with. The first option is to lower your sights on the type of home you’re looking for. Instead of trying to make $42,000 on a single flip, try to get six barrel-bottom properties that you can flip for a small, $7K profit. They may not all work out, but then again, they just may work out fine.
The other option is to hook up with other investors who are in your league. If you have the money for one property, and you can find five like-minded individuals, you can each own a piece of six different properties. Of course, both of these options involve more headaches and paperwork, but isn’t that better than finding out that your sure-fire deal has just been reduced to rubble? Of course it is.
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Until my next post,
James
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