How To Manage Risk In Real Estate Investments?

Then they fear the risk comes from their lack of knowledge. There is no need to feel naive or claim ignorance. The bottom line is that unless you do this every day for a living you will always feel 'out-of-the-loop'. Funny thing is - most people know what a stock is yet they have no idea what drives stock prices up or down. Yet, because the societal 'norm' is to buy mutual funds because a fund manager must understand the stocks better than you - people go out and buy mutual funds. Then, even if the funds/stocks go down, the fund manager gets paid and people invest more because they are saving for retirement. I buy mutual funds too - but this year (2008) they have lost money and I can't do a damn thing about it. In the worst real estate/mortgage crisis of our time, I'm making money in real estate investing. I'll hold on to my funds, but managing risk is about diversification.

Robert Kiyosaki (author of Rich Dad Poor Dad, and co-author of Why We Want You To Be Rich) with Donald Trump) said it this way - and he's absolutely right - "the more control you have over something, the less risky it is. The less control you have over something, the more risk there is!" In my real estate investments I control virtually every factor - when I buy mutual funds I can't tell the fund manager what stocks to buy and what to sell.

Suffice it to say that when you don't eat-sleep-and-breath in a certain industry, there is no shame in partnering with an expert. You rely on an accountant for tax advice, a doctor for medical advice, and a lawyer for legal advice. You probably don't know as much about their industry as they do because you don't study it or don't practice it every day. M&M Properties acts like the real estate doctor. We get paid to study the properties, the markets, the techniques, and the solutions (educate ourselves), and then we implement the solution (prescribe and administer the treatment) eg. property rehab and contract negotiations to name just a few, so as to make the property profitable.

Passive revenue is a buzz-word these days, and I believe in it for the right reasons. People continually talk about MLM (multi-level-marketing). Recently I suggested to somebody (who was trying to sell me on a MLM program where I get paid every time someone clicks on certain websites and web ads) that if you have to recruit each person into the program one-by-one, you could die of old age trying to build your network of people beneath you (the ones you get paid off of in MLM structures). The person went on to explain how the numbers work, and in fact could add up to be massive numbers further down the road. He told me "it's the best way I know how" "I truly believe in it as the way of the future."

Many people make money in many different ways in this world (including multi-level marketing). It's all about what you believe in and what you focus on.

I'll tell you this much:
1. Everybody needs a home - AND - the markets where I am buying/selling properties in actually enjoy significantly MORE demand than supply - thus no risk of vacancy or low rent.
2. The price can drop out of a stock overnight - and a company could go bankrupt - a housing market can go down but the house will never be worth zero.
3. The market is probably near the bottom - it has already bottomed out in the area I am buying/selling and is in fact already appreciating

Where the risk is eliminated:

1. Little to no risk of vacancy - carrying the cost of the property out of your own pocket.
2. No risk of property depreciating further
3. No risk of property falling apart b/c you just rehabbed it with all new materials - so cost of repairs is minimal
4. No risk of costing you more money b/c the rental income far exceeds the cost of the property.

But consider this for a moment. In very general and simplistic terms, if I buy a property with a little money down (of my own money), and after all expenses including electric, gas, repairs, vacancy, and mortgage, the profit each month (Cash-Flow) is $1,000.00, then I get my FULL investment back in a matter of months, and then my income (Cash-Flow/monthly income) increases by approx $800 - $1,000 per month from there ever-after until I sell the property. PLUS the value of the property keeps going up.

If you don't have the cash to put down right now, I know of investors who are using their credit line for the down-payment. For the record, I don't condone or advise in abusing credit to buy something that depreciates in value otherwise you get into debt and credit trouble. But as Robert Kiyoaski teaches, what I am referring to is good' debt eg. that what you purchase with borrowed money (debt) increases in value AND covers the cost of carrying the debt. That my friends, is how and why THE RICH GET RICHER - they leverage money!

They also buy low and sell high. We've all heard it, yet now when the market is low, everybody is scared. I don't blame them, but I flipped 3 properties last week to "RICH" people, because they (the rich people) want to buy low and sell high.

Think of it this way let's assume you get your mail and you have your Verizon bill.
QUESTION: how many people do you have to spend time recruiting into an MLM or Pay-Per-Click program, and how many hours of labor does it take you to raise the money (via these said methods) just to pay that one mobile phone bill? Now compare that to having an extra $800 - $1000 per month coming in without doing any work, above and beyond setting up the initial deal? That's the other way the rich get richer - they don't trade time for money - they acquire investments that provide 'passive' revenue and appreciate in value 24 hours a day, regardless of where you are or what you are doing with your time.

To me, it's about the amount of time you put in v.s. the amount of reward you get back. Last week I flipped 3 properties and I only spent a little bit of time on my computer to do the deals. I never used a penny of my own money.

To reduce risk, you must gain more control. To reduce risk further you must have options. In real estate investing you can reduce risk by purchasing properties below fair market value, or you buy properties that command rent that exceeds the carrying costs, or you can buy properties that are in a rapidly appreciating market. All of those scenarios reduce risk. When you acquire properties that meet all three criteria, you have almost reduced all of the risk. By having multiple advantages to the property, you also gain options regarding exit strategies. In other words, you reduce the risk of getting stuck with a losing proposition (property). If you have more than one option to get out of the property, that also reduces risk!