finance costs, financial liability and cross collateralization all matter. Are proper reserves available if the project goes over budget? Having reserves is essential. It’s important to not be over-leveraged. Historically, it's inevitable to have up and down markets. Financial management and operating philosophies should account for up and down cycles. LEGAL Laws between housing providers and renters has astonishing variation from state to state, and even vary greatly across jurisdictions within the same state. Doing something improperly can cause a litany of problems that often cascade. Potential exposures can be managed with appropriate administrative oversight and compliance with local and state laws. Legal documentation is critical. New investors may spend tens of thousands of dollars of their own money for down-payments or repairs, and leverage the balance of an investment purchase with tens of thousands in debt financing; yet, be unwilling to spend a few hundred dollars on a well-written lease document. ASSET PROTECTION Whether renting or flipping, protecting the asset and thinking creatively can mitigate damage from unanticipated costs. A proper and thorough inspection of physical infrastructure may provide for a value-add and negotiating opportunity. On the other hand, a less thorough inspection based on previous use and condition of the property may result in unforeseen costs. "BEING CREATIVEWITH INVESTING IN REAL ESTATE ISN’T JUSTABOUT CREATIVE DEAL MAKING. IT’S ABOUT CREATIVE THINKING, ANALYSIS, AND OPERATIONS: UNDERSTANDINGWHAT COULD GOWRONG, MANAGING THE PROPERTYTO PREVENT THAT, AND KNOWING HOWTO PROTECTYOUR INVESTMENT."
selection process unscathed, it’s time for lease signing and collection of security deposit. Do they have pets? A service animal? Is a reasonable accommodation necessary? Are you aware of the differences, and the subsequent documentation requirements? Saying the wrong thing could be in violation of the Americans with Disabilities Act (ADA), which may invite a lawsuit, a steep fine, or both. Once that lease is signed and the renter takes possession, the owner effectively relinquishes legal rights to the property to the tenant. Do you understand the legal significance of that? How strongly written is your lease? He thought he had me on the ropes, set up for his knockout punch, schooling me on why the fees I charged were too high. But instead, he found himself in the corner of the ring, sitting on a three-legged stool, with a proverbial black eye. Being creative with investing in real estate isn’t just about creative deal making. It’s about creative thinking, analysis, and operations: understanding what could go wrong, managing the property to prevent that, and knowing how to protect your investment. It’s like the three-legged stool: each leg of the stool is necessary for your business to remain upright. Remove one of the legs and the stool tumbles, sometimes with you on it. Risk reduction hinges around three key areas with property investment whether it’s a buy-and-hold, fix- and-flip, or another type of investment. The categories are fairly universal and can be tailored to your investment strategy:
FINANCIAL Elements such as rent payments, rent delinquency, turnover costs, rent escrow, lease terms,
32 | think realty magazine :: may 2020
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