Avoiding risk in a RED HOT real estate market

7 Ways to avoid the high risk of investing in real estate

Investing in real estate can be a little scary at times, especially for beginners. I have had a few investors recently email me saying they are blown-away scared, but excited at the same time.

But please don’t let your fears hold you back from jumping in. You are entering the NO FEAR ZONE.

Instead, use these 5 steps to minimize your risk and feel good about your real estate investments.

1. Buy the right house

You make money on real estate when you buy it, so it’s critical to buy the right house.

Everyone knows that real estate is all about location, location, and location. While it’s true that the best neighborhoods, schools, and nearby amenities are important, so are many other factors.

When buying investment real estate, you need to know:

? What the house is worth in “as is” condition?

? How much will it cost to be fixed?

? What is it worth once it’s fixed?

? What will the house rent for?

With those four numbers, you can make wise investment decisions. The bottom line is: You make money in real estate the day you buy the house so never pay full price and instead learn to buy off-market as a discount home buyer. It is like buying houses on the clearance rack at the mall (never pay full price).

2. Rehab your financing

Often, it’s better to rehab your financing rather then rehab the house! Before ordering your dumpster, learn to run your financial calculator to understand your financing costs.

How does financing right reduce risk? Most people don’t read their closing documents that include giving the bank a full-recourse loan through a personal guarantee, handing over future rents with rent assignments, and ultimately putting all your other assets at risk if something goes wrong. Reduce risk by running your financial numbers, reading your doc’s and getting the right type of financing. While on financing, one of my facorite ways to finance is seller financing. There are so many ways to carve up a real estate deal and minimize your risk it should make you hungry for more deals 

3. Know your house

Distressed real estate is frequently sold as is. This means that “buyer beware” is part of the deal and you accept everything that is wrong with the house.

The list of nasty things that could be wrong include structural damage, mold, lead-based paint, termites, underground oil tanks, bad roofs, faulty wiring, and a long list of other defects.

It’s fairly easy to minimize your risk when buying distressed houses. Get a home inspection from a certified home inspector or bring a licensed contractor to carefully review the home with you. Being prepared on your purchase will help you sleep better at night but in todays red hot market you need to be skilled at making fast decisions with limited amounts of information. If you continually over analyze every deal you will have NO DEALS at all. On that note, some of my best deals have been ones I never got because someone paid more than me so always stay optimistic!

4. Know your boundaries

The yard can sometimes be deceiving. It can be tricky to know the boundaries of the property, and you don’t want a future surprise (like the back corner of your garage is on your neighbors lot).

The way to reduce the boundaries risk is to have a licensed surveyor provide you with a survey before closing. They’ll put stakes in the ground and ensure you have no encroachments into your neighbor’s property.

Two times in 2021 I have had some messy surveys to correct. When you do this work before closing it is so much easier! I will never forget tracking down a seller in 2007 in DC and doing an exchange for his signature on an encroachment. Don’t do it that way, do it up-front ? to minimize your risk.

5. Use a professional team

Investing is a team sport! Build your team to help you invest in real estate for the long-term.

Your team should include a good lawyer, Realtor, Contractor and property manager. Your team will be able to provide you with the advice you need from acquisition through renovations–and long-term with property management

Investing in real estate can be complicated and having a great team can make the process manageable, so that you succeed long-term.

6. Protection from history

Buying distressed, off market real estate can provide tremendous upside opportunities for equity and long-term cash flow. The downside is that the investor must be very diligent in ensuring that the title is clear and insurable.

Sometimes title can be insurable, and sellers will try hard to get buyers to close on a house with less than perfect title. Buyer beware and be very certain that title is both clear and insurable, so that there are no surprises that end up threatening your equity position in a house. Your title company can help you with this.

7. Protection from the future

Do not forget your homeowner’s insurance. If you are buying houses with bank mortgages, it is highly unlikely you will ever forget your insurance. However, just recently, I know of a cash buyer who forgot to get insurance. Two days after they purchased the home they remembered and scrambled to get the house insured.

What would have happened if the house had burned down in those two days without insurance? They would have lost their entire investment. To reduce your risk in real estate investing, always have proper homeowners insurance and additional liability coverage, in case a tenant gets hurt and tries to sue the landlord. Avoid these risks by getting homeowner’s and additional liability insurance.

Do you feel better now? Buy the right house, in the right location for the right price, finance it the right way and due your diligence to know exactly what you are buying. Another way to do it is to participate in experienced investors deals. Let them do all the work and take the majority of the risk while you invest passively.