FUNDAMENTALS
RISK FACTORS
3 Critical Areas of Risk Management
HOW TO AVOID KILLING PROFITS AND CRUSHING REAL ESTATE DREAMS
by Michael Zuber
A
sk a real estate investor about risk management and you are
and bought everything site unseen for list prices; it was crazy and a clear sign the bottom was in. I also remember the wave of inventory hitting the market and daily price drops as others insisted “there’s no problem here.” It is far better to understand and recognize the top than it is to catch the bottom where bankruptcy looms. INTEREST RATE RISK: For the last 20 years we have been spoiled as the 30-year mortgage rate has generally trended lower with only short-term upticks. This recognition is important because I believe we are about to enter a three- to seven-year period where interest rates generally increase,
they have looked at their market nearly every day for two decades, I can tell you without question my market has cycles just like yours has cycles. Market cycles are determined by supply and demand imbalances but can be exacerbated by outside forces like government incentives, historically low interest rates, or tight lending standards. Understanding where you are in the cycle means you can lower your risk of being caught over-lev- eraged as many flippers did in the last crash when prices kept falling. All cycles eventually change, and you never see it coming unless you are in your market every day. For example, I remember the day that hedge funds came into my market
likely going to get a long discus- sion about entities, land trusts, and other vehicles to protect oneself from the potential liabilities of being a housing provider or an investor. While these are critical topics, I believe they miss the most important aspects of risk management in real estate investing. I break down risk management into three critical areas that any investor should acknowledge to mitigate risk in their own business: Market Cycles, Interest Rate Risk, and Operational Turnover. MARKET CYCLES: As a 20-year vet of real estate investing and someone who can say
24 | think realty magazine :: june 2021
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