Real Estate Blog

Last week we discussed handling your own apprehensions in risk management by seeking the help of a knowledgeable real estate investment professional, and essentially serving an apprenticeship. It's an invaluable model to both learn a new "trade," and to have a wise counselor at the same time. No investment pro worth his salt will tell you he can make risk go away, but he will show you viable techniques to minimize risk.

I like to tell new investors that all investment is a process. If you work the process, you're immediately hedging your risks. This starts with doing your own math. Check out the numbers you're being given. When people start claiming really high rates of return, which you're going to run into right and left, some new investors can't see past the dollar signs in their own eyes.

Check ever single thing: rent levels, tax rates, expenses, payment history, deposits, improvements, the need for future modifications. And don't just look at someone else's totals. Ask for the data, break out your calculator, and if your math doesn't match their math, find out why.

Never lose sight of the fact that you are not just buying a property, you are buying a business. Each property in which you invest carries the potential to make money. There are, however, inevitable factors that can work against that potential like re-investment to improve the property, the loss of tenants, and just the time involved to properly administer the acquisition. Real estate investing is a hands on proposition, not passive income.

If you pick up a property that inhales your working capital every month, you've landed in a negative cash flow situation. That's a stressful and expensive place to be. Constant appreciation is difficult to calculate for a beginner, so you can wind up with a property that is so negative in terms of its cash position, you just can't hold on to it long enough for its real benefits to be cultivated.

And that takes us back to the main point: apprenticeship. New investors need someone to show them the ropes, and to throw them a rope before they step over any cliffs. Case in point, inspections. You don't just accept a report, even from a professional inspector. You start turning over rocks regardless of the initial out-of-pocket expenses that might involve. Trust me, if you don't know what you're buying up front, it's going to get a lot pricier down the road when the problems start cropping up.

Start with an ordinary home inspection, but then really look at the report, talk to the inspector, and then call in the specialists. You may need a plumber, a foundation man, a roofer, an electrician, an AC company. Do what you need to do. Ask for free estimates, but don't scrimp on up front money to get the real information you need to appropriately evaluate a property.

These are the steps involved in actually deciding to invest in a property. The risks don't stop there. Next week we'll talk about the documents involved, the insurance requirements, and the need to charge fair rents. Remember, this is a process. It proceeds in phases. Learn the process, learn the phases, work each one, and you can effectively minimize your risks.