Without risk, there is no reward, but we all have certain levels of risk tolerance. And taking on more risk than you have to for a potential upside doesn’t make sense, especially when you’re just beginning to invest in real estate and have less to fall back on. These are 7 strategies top real estate investors use, and you can too to mitigate real estate investment risk and maximize their ROI.
1. Understand the Investment
No one should ever buy into something they don’t understand. And you should always read the fine print. So the first strategy is to make sure you understand what you’re buying. You’ve done your homework on the area, property, regional development plans, and related markets.
You’ve read up on avoiding real estate investment pitfalls, so you can learn from the mistakes of others to reduce the mistakes you have to make.
2. Share the Investment
With any business, sharing the risk with multiple investors can be advantageous. No one investor has too much to lose, and together you can often invest in property with higher money-making potential than any of you could buy alone. So, even though you’re splitting it multiple ways, your ROI can be much higher.
There are several ways to do this. Among them, a tried and true approach is crowdfunding. What is real estate crowdfunding? It’s when a group of investors pool money together on a short- or long-term real estate project, share project management, share the risks, then split the profits.
This may seem like an investment strategy reserved for the wealthy and connected. But it’s increasingly accessible for the average investor and much less risky than private funding.
3. Look for Below-Market Rented Properties
Sound counter-intuitive? Hear us out. Imagine you have your eyes set on investing in a residential duplex to rent both units out.
When a property is leasing for below market, this usually means the current owner is struggling to make repairs and updates. They’re likely ready to move on and are willing to take less in rent rather than fix the place up. And they’re probably not attracting the more reliable tenants.
Now, you can buy this property under market value and fix it up, and as leases end, rent it for more while following local rules on leasing and rent increases.
This maximizes your cash flow and increases your ROI while cutting risk.
4. Make a Bigger Down Payment
This one is controversial because we’re saying to invest more upfront in reducing risk. And some would say don’t tie all your cash up in one property.
But this can work in your favor if it helps you get much better terms on your loan.
Being over-leveraged on a property is risky and could force you to sell short to avoid damaging your credit. Less favorable terms mean higher monthly outflow, which makes it harder for you to grow your real estate empire.
5. Invest in the Up-And-Coming
Check out city planning for the next year, five years, 10 years. Research area developments and how the city where you’ll invest revitalizes areas. Look at the population projections. Are people moving in or out?
Your goal is to buy a property that’s in an area that will be going up in value more quickly than average, so you build equity faster, reducing your risk.
For residential areas, some other indicators of an up-and-coming neighborhood are:
- Lots of renovation or construction
- Multiple “for rent” and “for sale” signs
- Big new development on the way
- Local buzz (You can check out local social media on Nextdoor)
6. Know the Local Laws and Regulations
Before you buy anywhere, it’s critical that you look into any state or local laws that may impact your plans to make money. For example, in some states, renter protections are extreme, and you need to know how to play by their rules.
In some cases, these protections may encourage you to steer clear of buying a rental there, instead opting for rehabs, straight flips, commercial, short-term rentals, land, or other types of real estate investment.
7. Think Short-Term
Sometimes thinking short-term can be a great long-term strategy. If you plan to keep a property for no more than <1-8 years before selling it, then a 10-year adjustable-rate mortgage may provide you with much better terms, reducing outflow. You’ll sell it before it gets to year 10, so you have minimal risk of the loan turning over.
The property is likely to go up in value, even more so if you’ve applied other strategies here. Now, you have equity that you can cash out to buy more properties and grow your portfolio.