Real Estate Risk vs Reward

We all talk about the wonderful benefits of owning real estate. There's the cash flow, the appreciation, the tax shelter and the equity build up. There is also the pride of owning a portfolio of performing properties and the security of knowing that our future is financially secure. There are so many benefits that sometimes we forget about the flip side of the coin. The risk!

A major issue often ignored by beginning real estate investors is risk. While real estate produces a wide variety of attractive benefits, it can also carry with it a tremendous amount of risk. Wise and prudent property owners and operators know that to achieve the benefits, you must control the risks. As you buy and operate property consider carefully the following common risks:

1. Financial Risk; the risk of losing your money: Can you afford to lose your initial investment and possibly (although remote) that you will be required to payback all personally guaranteed loans even if the property has no revenue stream.
2. Operating Risk; the risk of damaging your property and operation due to a lack of professional skills: Do you have (or have access to) the skill set necessary to effectively operate the type of property you own or are buying. If not, you will never achieve highest and best use, and you have the possibility of impacting the property negatively to the point of insolvency.
3. Legal Risk; the risk of not using the law to protect yourself: Have you done all you reasonably can to safeguard your personal interests by using proper legal forms of ownership, adequate insurance coverage, effective documentation and quality employees and contractors.

As with success in any business undertaking, the real pros in real estate know how to reduce risk and act accordingly. They understand the differences in the various forms of ownership, insurance and operating processes and protocols. Many learn their lessons from the school of hard knocks. That is an effective way to learn, but often time-consuming and expensive. You will be better served by getting the education you need and learning from the mistakes of others, rather than make them yourself. By understanding the experience of others, you build a pool of mental references that will accrue to your long-term benefit. By learning and assessing both the risks and rewards of owning real estate, you will be better able to make the decisions that will build your portfolio and achieve your goals, and less likely to find yourself mired in the tar pits of inexperience and misinformation. When the needed elements are in place, your risk is greatly reduced and your reward exponentially more likely. Luckily, with a little wisdom and planning you will be able to professionally minimize your real estate risk while maximizing your financial rewards.