No Such Thing As a Risk Free InvestmentBy JD Esajian on October 9, 2013
Despite what you may see on TV or read on the internet, investing in real estate is not easy. What often takes months, and plenty of trials and tribulations, is condensed into a 30 or 60 minute TV show. The end-product neglects to convey the hardships that were experienced in closing on a property. In realty, finding and closing deals takes hard work and plenty of persistence. What they don’t show you on TV is that when you invest in real estate you can lose money. Remember, there is no such thing as a risk free investment.
Regardless if you are renting, flipping or wholesaling, you can lose money if you are not careful. Due diligence is required to run accurate numbers on every deal. What may appear to be a safe rental property on paper can turn out to be one that has negative cash flow if you aren’t looking at the big picture. The properties that appear to be the safest are usually the ones that get you into the most trouble. You don’t think you need to put the same work in that you normally would with a risky property, so you make assumptions on what is posted online or what your realtor tells you. Once you let your guard down, you find that the property may not be exactly what you bargained for.
Poor planning and unrealistic expectations are the biggest culprits for lost profits. Nothing causes investors to lose money quicker than hope. They hope that the property value reaches a certain point. They hope that their repair budget does not exceed a certain number. They hope that they can finish the project in a certain time-frame. You need to have a sound exit strategy on every deal, but this strategy has to be realistic or it doesn’t do you any good.
If you do not expect the worst case scenario on every deal, you are asking for trouble. Those investors who handle property issues the best have likely played every scenario out in their heads prior to the deal. You may not think these things will ever happen, and they usually don’t, but what if they do? This is what causes even experienced investors to lose money. They are not prepared for negative situations and they end up making decisions that they normally wouldn’t make.
Before you get involved in any deal, you should look at the big picture and see exactly what your options are. You may assume that the value will increase if you do your work, but that may not always be the case. Look at all of the comparable sales and listings before you assume anything. Don’t just look at the comparables that will satisfy your argument, look at the ones potential buyers will focus on. If this ends up being too much risk for too little reward, you should walk away and wait for the next deal.
There is nothing wrong with making a small profit on a deal. Many investors make a great living hitting singles throughout the year. What you never want to do is to take a step backward and lose money on a deal. This sounds obvious, but it happens more than it should. Regardless of what you are investing in, there will always be risks associated. Before you blindly throw money at a property, know what you are getting into and know all of the risks associated.