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Ryan G. WrightJul 21, 2016 3:22:11 PM4 min read

Risky Business: How to Professionally Handle Risks in Real Estate Investments

As we all know, investments in real estate can be risky business. There are many risk factors which lay outside of our control, such as how much the property will sell for, or whether or not the property will even sell. Fortunately, there is a greater number of variables we CAN control to combat unfavorable odds when it comes to investments. The more the investor is educated about the risks and how to handle them, the greater the chance he/she has for overall success.

When looking at risks, it’s important to ask yourself the following FIVE QUESTIONS:

1. How Can I Minimize the Risks in My Investment?


Fixing and flipping a house for profit is a risk, but fortunately there are several risk factors you can take into consideration before you even apply for funding! Look at property details, such as:

  • Significant mold/meth/fire damage of the property
  • Crime rate of the property’s location
  • Size of the property/property type
  • If the property is located near a commercial area or on a busy street

Just by looking at the details of the property, you can significantly lower the overall risk of your investment. Additionally, Do Hard Money has a software program called the Advanced Deal Analysis, which calculates all of the risk factors involved in your deal and determines where the property sits on the overall risk scale. It can also estimate how much you would need to rehab the deal, how much funding you could qualify for AND how much money you could end up making in profit.

For more excellent information on minimizing risks, check out our spin on Jeff Foxworthy in our blog post: “…You may have a resale problem.”

2. How Much is Actually in My Control?


In any situation where risk is involved, you want to be prepared. Just as you wear a seat belt when you take the risk of driving or riding in a car, there are certain precautions you can take to protect yourself from the risks associated with real estate investment. These precautions are especially prominent in the rehab phase of your deal:

  • Do some research beforehand to determine which upgrades will add to the value of the property.
  • Determine which upgrades are more popular among buyers these days.
  • Target these buyers by rehabbing areas of the home which include these upgrades they’ll be looking for. For example, kitchens with the latest appliances, granite counter tops and complementary cabinets are a big selling factor.

When you execute your rehab, ask yourself what is in your control to change and then change it. But make sure you model the updates in the home to what buyers are looking for and what will add the most value to the home. This will help minimize risk and increase chances of your rehab deal being sold quickly.

3. How Much Can I Afford to Lose?


I know that sounds like a downer question, but it’s an important one. You need to be aware of ALL of the facts in your investments, including contingency plans. With real estate investments, it’s always good to plan for the worst and hope for the best. You can best plan for the worst by saving a solid down payment, earnest money and other funds to cover potential purchasing and selling costs. In regards to planning for the “worst,” many hard money lenders will already have you covered. The best hard money lenders will refuse to lend on deals which have too many risk factors, thus minimizing your chances for foreclosure. They will work with you to determine which deals are the best ones to invest in, so that you won’t have to be worried about how much money you could potentially lose on a deal. For example, Do Hard Money has a policy that if a deal can’t generate an estimated $10,000 profit for the borrower, they won’t fund it.

4. What are My Options?

It’s always good to have contingency plans in place. Should the worst case scenario happen and the deal is having trouble selling, you can work with your hard money lender regarding the options you have. They can provide tips to help make the property more desirable, such as:

  • Staging the house more attractively
  • Renegotiating the asking price
  • Strengthening marketing strategies
  • Building a buyers list

Your realtor can also give you options to help you sell the property so that it doesn’t sit on the market while interest on loans accumulate.

5. Are My Bases Covered?


This goes hand-in-hand with exercising options. In the event that the risk gets the better of the situation, it’s just as important to have safety nets in place. These can include insurance and other precautionary tools. Talk with your hard money lender about these safety nets and which tools you can take advantage of to ensure all of your bases are covered. For example, Do Hard Money has a policy known as the SPE or Special Purpose Entity, which requires the property be owned by an LLC to act as security for the loan. This safety net is in place to protect the borrower and ourselves in the case of foreclosure or other losses.

Now that you know what to consider when taking risks, you can now go out invest with more confidence than ever! Remember, there are risks involved in nearly every choice in life. The presence of risks shouldn’t keep you from taking the leap in this new adventure. Rehabbing and flipping is a profitable project which can help you earn more money in less time than you thought possible. The saying is true: “Nothing ventured, nothing gained.” So, take off on this adventure and you’ll soon see the tremendous gain!

See how all this works by registering for our next webinar.