For many people, investing can be a frightening idea. Most everyone works hard for their money and are fearful of losing any portion of it by investing. They think that investing is for “those rich people” and that it is not something for the average person. While it is true that every investment has a certain amount of risk, investing your money allows it to work for you and helps build wealth on top of what you are earning at your job. For anyone who has ever been interested in investing in real estate but has been afraid to take that first step, below is a list of 5 things that may help you mitigate some of that risk.
Education is first on the list because we feel that this is the most important. As is the case with anything, the more time you take learning about a subject, the better equipped you are to make the best decisions. When it comes to real estate investing, this couldn’t be more true. We believe there are three ways to educate yourself that will help mitigate your risk when it comes to investing in real estate. First, you need to educate yourself on whichever niche you choose to invest in. Whether it’s flipping homes, buying rental properties, or even lending money to other investors, the more information you learn before you start, the better off you’ll be. Second, you want to learn the market that you will be investing in. If you want to flip homes in Oxnard, you should study all of the different neighborhoods in Oxnard. If you want to buy rental properties in the Mid-West, I would find out as much as I could about the city you will be investing in (including its current and future economics). Lastly, you should always analyze every investment you make. Never take anyone’s word for anything, as not doing your own due diligence is a sure-fire way to lose money.
Another great way to mitigate your investing risk is through diversifying your investment strategies. Once again, this can be done in three ways. First, you can diversify your investments in different asset classes. Instead of buying and holding all single family homes, maybe you can buy a few duplexes or triplexes. Or instead of just investing in all residential real estate, you could purchase some commercial opportunities. Another great diversification method is to buy real estate in different areas. Since all real estate is specific to the local market, buying properties in different areas can protect you in case the one area you are investing in experiences a housing market collapse. Home prices in Ventura County are known to have rapid appreciation, but they can also drop just as quickly if the economy turns sour. Buying homes in other areas of the country where the housing market does not change so sharply can offer you some form of protection. Lastly, there is always the option of investing in different asset classes. All of your investing money does not have to go to real estate and can be used to purchase other asset classes such as stocks and bonds.
EVALUATE YOUR RISK TOLERANCE
There’s a common saying in regards to investing – if an investment keeps you awake at night from worrying, it may not be the best investment for you. Everyone’s risk tolerance is different and before you invest, you should be honest with yourself and evaluate your own risk tolerance. Although there are ways to mitigate risk, there will never be a way to eliminate risk completely. The level of returns you earn usually mirror the level of risk, so you should take this into consideration. There are ways to earn a great return on your money, but is it really worth it if you are worrying about it all the time and causing yourself undue stress. It may be better for you in the long run to earn 3 or 4% versus 10 or 12% in order to know that your money is in a relatively safer investment.
HAVE AN INVESTMENT GOAL
Many financial planners would recommend that you have some sort of goal before choosing an investment strategy. Whether you are looking for short term gains or have broader plans in mind, like taking care of your retirement, laying out your goals will most likely enable you to reach them faster. For example, many new investors have a goal to earn enough passive income in real estate to be able to replace the income from their day job. If you earn $5,000 a month at your job, you know that you have to earn $5,000 a month in passive income and are better suited to make investments to help get you there. In this case, you will probably want to buy rental properties or invest in notes vice only doing fix and flips.
RE-EVALUATE YOUR GOALS OVER TIME
Finally, you should re-evaluate your goals every few years. As you get older, you will probably find a point where you reach your initial goals and will need to set new ones. Not only that, but your risk tolerance is likely to decrease as you get older. When you are young, you have more time to recover from any losses that you may experience in your investing career. Many investors slowly start moving their assets to less risky investments as they grow older and become more successful. If you do not re-evaluate your goals fairly regularly, you may find yourself in a spot where you have unwillingly lost money and do not have the time or means to recover from that loss.