Real Estate Investments - Just How Risky Are They?

Monday, 15 July 2013

Real Estate Investing Just How Risky Is It? What Can You Do About it? What's the real scoop? Why are there so many real estate investment seminars making the business look easy, while real estate investors I know are experiencing something more involved?

It does not matter whether I am listening to radio, late-night TV or Saturday morning infomercial, I can always discover a real estate program promoting fast ways to make big money, and I wonder if I am missing out on something? So what is going on? Am I overlooking important learning opportunities with these money-making training sessions? One is left with this message: If it is this easy to make money in real estate, then why isn't everyone doing it?

It appears is that we are receiving the upside of the business: good deal making techniques, and the periodic great deals. We need to realize the limitations of what we are seeing and to understand what we are missing with many of these training seminars. That is not to say that there isn't money to be made in real estate and that one cannot make a good living with real estate investments. There are great techniques for acquiring and developing good investments on a number of levels. And the business can provide you much satisfaction and freedom. However, you can trust that there is more to the real estate business than what is presented in the typical real estate seminars.

The more successful businesses are structured and have developed business models (methodologies) to work by. They provide controls over accountability, guidance, risk management, legal protections, and quality assessment (assurance) to ensure that their products and services meet their customer needs. We have all heard the comment, "Oh, you are in real estate. Isn't that kind of risky?" The answer, of course is that it can be, and for many, it often is! Does it have to be so risky? No! But, have you ever attended a real estate seminar in which the presenters discussed risk management or assessment? Why not? Doesn't it apply?

Real Estate gurus often tell their audience what they want to hear, rather than the broader picture of what they may need to know. We all need to know the positives and the value of good real estate techniques. However, isn't there a need to provide a more complete view of real estate business, including asset management, standard business practices, and checks and balance, not just investment techniques alone? For example, would you appreciate some advice on effective property management? Don't you want to know more about what to do in tough times or when you are getting in over your head; how to advert bad decisions, and how to expand your business and how to protect yourself? Every business person has good and bad times. But not all businesses go under because of hard times. Most of the businesses I know deal with risk management, either on a formal or informal basis.

My Recommendations: Here are three (3) key things you should develop for your business. While they apply to all businesses, they particularly apply to real estate:

A. Vision for your business

Martin Luther King said, I have a dream! Likewise, you need a dream and a vision of what you want from your business. Writing it down and keep your vision honed.

B. Well-defined Business Plan (cradle-to-grave)

If you don't have a plan for your vision, how are you going to have your vision come true? Your plan should include a description of your objectives and actions for the start and completion of each major program or project you are doing.

C. Risk Management Plan

It is your duty to minimize your risks, and maximize your successes. It is much easier to make changes in direction early on, before you have to pay the price in dollars later! Risk Management is about diversifying your options (not putting all your eggs into one basket), identifying best and worst case scenarios, reviewing your performance regularly, having a backup plan, when your master plan fails, and finally learning from your mistakes!!

A) Create a Vision for your business You create your vision through the following:

Values you uphold for your company

Purpose of your company

Goals which detail how you are going to accomplish what you want to do.

Taken collectively, these three provide you with your Business Vision, or Mission. After think about these three areas, you should write out your mission statement and your goals and objectives for your business. A business vision is not cut in stone. As your business grows, so will your vision.

B) Structure Your Business How do you start planning your business and identifying your activities? You can take classes, read books, and talk with professionals and mentors. To ensure that you have thought of all issues regarding your business set up, it is a good idea to write down these 6 interrogatives to help you capture the whole of it:

Who, What, Why, When, Where and How

All six can assist you with your planning. For example, in general, you will want to define Who is involved, Why you are doing the business, What you want out of your business, How you plan to get there, When you plan to start (timetable), and Where (location) you expect to operating your business. Below is an example of a structured business model. How detailed and thorough you are in its use, depends upon the maturity and size of your business. You will want to define your tasks and detail to the degree required to manage your business. However, the four Phases are generally accepted categories. For more information, you can, of course, attend classes, go online and search for business models or business methodologies, or consult our web site http://www.globalrealestateinvesting.com later:

I. Analysis Phase:

- Define your vision and mission

- Define your objectives, according to your mission

- Identify your resource requirements (people and materials)

- Identify real estate for your business development

- Define a risk management model

II. Design Phase: Define a plan or prospectus on paper (include marketing and staging approach as part of the design)

Select real estate - determining current and future value of investments for purchase or sale, according to your plan

Collect data on required resources (people and materials) and their costs

Create a total cost estimate for each effort (often called a Work Breakdown Structure-WBS).

Review the labor and cost estimates with other key members for confirmation, make modifications to your estimates, as necessary.

Consider developing your real estate in workable phases

Establish checkpoints to review performance, and test your results with the market

III. Development / Renovation Phase Perform construction / renovation / project management projects according to your plan

Regularly hold brief reviews with key members to confirm your progress

Make changes to your work activity according to review recommendations

Prior to completion, make a test walk through of the properties to ensure work is to Plan (Review development and staging activities)

Complete work (punch-out) and any final updates for final review

IV. Implementation Phase Review plan for staging property(s) and Marketing approaches

Make corrections to the plan, based on review results

Document lessons learned from our real estate developments

C) Develop a Risk Management Plan

Are you having trouble keeping your activities under control? Are you continually overrunning your budget? Did you complete a renovation project or manage a year of lease/rental income that should have provided you a good profit, but ended up giving you little to no real profit? If so, then you need to define a Risk Management Plan:

Risk Management is a tool that is not referred to enough in managing real estate businesses. It can be critical to the survival of many businesses. Most people think of "risk" when they think of real estate investing. So, why would you not develop risk protection for your real estate business?

RISK MANAGEMENT Definition:

The process of analyzing exposure to risk and determining how to best handle such exposure.

The decision to accept exposure or to reduce vulnerabilities by either mitigating the risks or applying cost effective controls.

So, what is at risk?: Your time, your money, your physical assets, and suits against your assets and integrity. For real estate, Risk Management can be viewed as performing a series of risk protective activities at periodic times during your property development efforts, starting from the day you start your business to its operations and ultimate sale. [Creating a contingency plan, having access to attorney services, and incorporating your business are part of your Risk Management Plan]

If you are doing your job correctly, you should be able to determine before your begin a real estate project:

Anticipated profit you will take for your effort

Current value of the investment

Future value of the investment upon completion

Completion Time for the investment effort

Can you say this now? If not, you are not really ready to renovate a property for sale and profit!

Here are examples of how I have used risk management techniques in my real estate development activities. I always keep in mind that good locations and good residents are my most important assets.

Example #1-building cost reductions: Year 1999, Purchase of two 4-unit buildings as one property in good area; units were section 8 in need of major TLC (deferred maintenance and a classical diamond-in-the-rough ).

Purchased low, required inspections, negotiated with Seller on $10,000 post-inspection cash return for improvements Talked with landscaper on removal of overgrown bushes. They wanted $2,500 for effort. I declined. Within 6 weeks, using a chainsaw (no massacre here), I trimmed all bushes, creating a bonsai effect, placed mulch on beds using free mulch from a community resource center, and planted flowers. Renovated each apartment on a unit-by-unit basis as tenants left; upgraded exterior with new landscaping, decorative painting, and artistic fixtures Sold both buildings to local LLC for full-market price, $100,000 profit within 6 years

Risks managed: Materials and Management costs were kept low, so that tenant income and sale profits are maximized, using sweat equity.

Example #2 Seller Creativity during a Buyers Market: Year 2006 Sale of Historic Home in a financially-stalled historic district (tough sale for a tough period).

Reviewed listings and purchased bank-owned double with extra lot, very close proximity to local university and hospital Re-converted badly-designed double to original single-family home Installed high-end kitchen and bath cabinets, using discounted display cabinets and counters from a local home improvement store. Installed discounted high-end lighting (commercial lighting company provided 50% discount for using his services for my renovations); restored ornate doors and woodwork, landscaped yard, planted flowers During sale period (Buyers Market): extended my potential client market to include both residential and commercial clients; introduced my listing to Real Estate mangers for local hospital and university. Received excellent offers from the hospital and a professional person with the Air Force.

Risks Managed: Ability to sell home in a marginal area for a very good price during a Buyers Market; Expanded client base to both commercial and residential through location of home, provided several sale options, including Seller financing to help motivate Buyers.

Example #3 Management for Protection and Income Maximization: Year 1977 - current Use preliminary telephone and interview screening and credit screening for all applicants; following this up by directly personally contacting employers, landlords, and relatives Establish rules and conduct requirements verbally and in written Leases; provide checklists, support policies, and show residents that I care Remain strict with Lease requirements, rent payments, and the rights of other residents. However, I remain flexible and supportive of residents needs; making repairs as soon as possible; providing simple courtesies such as asking about the family, their interests, needs; I always tell residents that we appreciate their presence. When residents have established a good rent-payment history and start having trouble paying rents, I am flexible and work with them. I have created notarized payment plans, have created agreements to spread payments over periods of time, and have had residents work for me on occasion. I consider the comments You are the best landlord I have ever had to be the highest compliment and a definite risk management safety comment.

Risks Managed: Maintained residents for extended periods (maximizing profits); Ensured that residents knew who I was and that I was responsive to their needs and concerned about their well-being. This provided security, as residents were less-likely to be upset with management or damage the property, or move-out! It also builds a good tenant base, as word-of-mouth provides you with good residents.

I hope that this information has been helpful.

So, just how risky is real estate investing? . . . . . .only as risky as you are willing to make!

For more information, visit my website, www.globalrealestateinvesting.com