"Real estate investing is risky." Don't you love it when someone says something that obvious? Of course, what is considerably less obvious is how you manage that, both in terms of the practical business and financial considerations, and your own psychological tolerance for the process. Truthfully? The best way to get "used" to the risk is with help.

Apprenticeship used to be a standard model for learning a new trade. You want to learn to be a silversmith? You go find a silversmith. You want to learn how to invest in real estate and not get eaten alive on your first deal? You go find yourself a seasoned realtor who specializes in investment properties. Not all agents are the same, and it's important to realize that those who deal in investment properties are specialists with a high level of expertise.

Working with an expert, you will learn to be an expert, and how to manage all the issues that have to be addressed before you make an investment:

●      cash flow,
●      capital appreciation,
●      tax benefits,
●      loss of management,
●      equity paydown,
●      and about a "jillion" other factors.

But, from the beginning, you have to accept that risk and gain are inseparable. If you want the reward, you have to take the chance. The real question you should be asking yourself is not "should I take the risk," but "how can I minimize the risk as I move forward?"

Before we tackle all the fine business points of risk management, I want you to really look at the biggest wild card in the deck: your own fear. Right now, in light of the past three years of recession, high unemployment, and the mortgage crisis, preserving capital and having an exit strategy are at the forefront of investor's minds -- often to the detriment of deal velocity. Brokers have to choose their words very carefully. This is literally a business climate in which one wrong word can kill a deal.

The best thing I can say to you in that regard is to get up every day and remember where you're trying to do business. Austin, Texas. A city that has been tapped as "recession proof." A city that is the number one destination for retiring Baby Boomers. A city that will be home to the only Formula 1 track in America . . .

I could go on and on and on. In fact, I have, for months right here in this blog. All the theorizing about risk management in the world changes in light of an accurate assessment of the local market. Next week I'll talk about things like negative cash flow or the failure to have a thorough inspection, but from the beginning you have to decide to "do it afraid."

Actually, I recommend not being afraid, and just being prudent, but we're all human. Everyone has that moment in a deal when your gut rolls over and that voice in your head says, "WHAT are you doing?" That's a vital point in risk management. And that's the first point of the risk management process you have to tackle. From there? The rest is just business.

Posted by Monte Davis on
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