Seizing Unique Opportunities—Do the Risks Outweigh the Value?

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Greetings from the metropolis of Cedar Crest, NM!

Today I celebrated my 39th birthday…on my journey to 40…..yikes!  I remember trying to burn my parents house with a magnifying glass at the ripe age of ten….now…wondering if my ten year old is trying to do the same.

I was talking to my childhood friend, Efrem, this morning and he told me he was getting ready to attend his twenty year reunion.  The word “twenty” rang in my ears long and hard.  What happened to the ten year reunion?  I feel like I just graduated from college….grad school….did I just sleep through it all?  Possibly….but more importantly, A quick reminder that “the time you have is all the time you got.”

Anyway….

Today’s topic is taking the plunge into doing your own thing.  Specifically, investing in real estate. I remember not to long ago taking a leap of faith and trying to do my own thing vs. “working for the man.”  It was a scary time.  Leaving behind the security of a job and seeing if I could make a go at real estate investing.  There were a lot of scary times where I felt failure was eminent….but somehow….it has all worked out so far.  That was eight years ago.  First investments were residential homes…then small commercial deal…then it grew from there.

The one thing I learned is that starting your own business is like having kids. It is never the right time, it is never going to be the right time, so the time is NOW.

So….what is your next step?

There’s an old saying that you can’t win if you don’t play the game. And, it’s true for real estate. If you don’t take the plunge, you can’t collect the money. But, at what point do you decide the risk is worth it?

Understanding What’s A Good Fit
Being proactive is generally a safer risk strategy. This means that if you take the time for self-assessment and research, you will better understand your risk mitigation comfort level. If you are a first time investor, you don’t want to sink your capital into something that requires sleepless nights, tenant hassles and more money than what you are bringing in from the investment. On the other hand, if you are a seasoned investor, you have a good idea what types of property will work for your investment personality and will automatically steer yourself away from risk that is beyond your tolerance.

Looking With a New Perspective
Once you know what your risk tolerance is, do not limit yourself to a certain investing mindset that fits properties into your portfolio. You may “know” you want to invest in an office building that is an “A” level property with a certain dollar amount. However, you may realize even greater earning potential by looking at unique opportunities. Choose to focus on the risk level of a property and determine if that will fit your portfolio.

Risk Mitigation—Bringing Balance To Generate Cash
According to businessdictionary.com, risk mitigation is the systematic reduction in the extent of exposure to a risk and/or the likelihood of that risk occurring. By looking at investments through a risk mitigation perspective, you can begin to analyze your investments as big risk/high potential rate of return, big risk/low rate of return, medium risk/medium return, low risk/high rate of return and low risk/low rate of return.

Smart beginning investors will grow their portfolios with both high potential rate of returns and low risk properties. This allows smaller and more steady cash flow from less risky investments to cover gaps from more risky investments.

Making It Work
Investing in commercial real estate should focus on generating cash flow, not generating unbearable risk. But, how do you make this work?

Let’s look at an example:
A property in your desired market area that you have classified as high risk/high potential carries a high investment cost. However, extending your desired market area by 50 miles opens the opportunity to invest in a low risk/high potential with a substantially lower investment cost and brings tax incentives because it is considered a lesser-desired area. If you first invest in the low risk/high potential, you can build the wealth from the investment to then also invest in the more risky and costly investment while covering any gaps that may result from the risky investment.

But What If I Really Like Risk?
As with any investment strategy, there is no one right answer for every investor. If you want to take the plunge and throw it all into a risky investment, you may have a substantial payout. You may also lose everything. Decide what you can handle and then grow your wealth!

Well…until next time…..rob

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