HOW TO CALCULATE RISK TO DETERMINE PROBABILITY OF AN OUTCOME
by Brian Wojcik
hen talking to prospective clients for my property management business, I always say, “rental prop-
WHAT IS RISK?
erty management is really about Risk Management.” I often tell the story of a client, who had previously decided to self-manage. Although he always tried to do the right thing, a small, innocent error led to a spiraling sequence of unfortunate events. The story was an example of how small errors may go undetected, unknown, and remain unrealized, until something goes wrong. Consequences in total were severe, not only financial misfortune, but it also left a lasting and profound psychological impact. But, if nothing goes wrong, is there any risk? Risk is measured using statistics and derived from both quantitative components and qualitative factors. Quali - tative factors are a challenge, particularly for individual or small unit-count property investments. Included are interpersonal relationship dynamics, such as behavior, which is possible to recognize but a challenge to quantify. Qualitative risk management planning effectively re - duces or eliminates consequences — and is the focus of this column — with most benefits achievable without
Various definitions of risk depend on its grammatical use: • a situation involving exposure to danger (Noun), or • expose (someone or something valued) to danger, harm, or loss (Verb).
statistics. An annual assessment exercise allows most real estate investors to improve business practices, whether doing rehabs, long-term holds, lending, or some combination. It is not difficult with the right tools and understanding and will elevate your business to the next level resulting in larger gains and smaller losses. Critical thinking and arithmetic are the only things necessary for implementation.
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