How to Mitigate Risk as a New Real Estate Investor

How to Mitigate Risk As a New Real Estate Investor

Real estate has historically been a solid long-term investment. It has its risks, but real estate generally provides a very good return on investment over long periods of time. The key to success is to mitigate risk while looking for opportunities to maximize returns.

As hard money lenders in Salt Lake City, we have financed our fair share of local real estate opportunities. We have helped fund everything from multi-family residential apartments to downtown office buildings. And we have learned what it takes to mitigate risk in the commercial property environment.

1. No Shortcuts on Due Diligence

If you are new to real estate, one of the most important rules for mitigating risk is this: do not take any shortcuts on due diligence. Due diligence is your best tool for thoroughly understanding the opportunity you are looking to invest in. It is your best tool for getting the clearest possible picture of whether the opportunity will ultimately be profitable.

2. Familiarize Yourself with Property Types

Commercial property is categorized by type for investment purposes. The most common categories are:

  • Industrial – warehouses, manufacturing spaces, etc.
  • Office – office buildings and flexible office space
  • Retail – strip malls, shopping centers, standalone retail buildings
  • Multi-family – apartment complexes, residential high-rises, etc.

In addition to these four, there are others. You can invest in medical, self-storage, special-purpose, and even elder care properties. The point of familiarizing yourself with property types is to better understand the market for each one in a given area.

3. Know the Market

Knowing the market for a given property type is not always easy. But before you apply for a hard money loan, do as much research into the market as you can. Home in on supply and demand. For instance, multifamily and office properties are doing very well in Salt Lake City right now. How well will they perform five or ten years down the road though?

You cannot predict the future. However, you can look at historical market trends. You can see what is happening here in Utah and compare it to trends in other parts of the country. Understand as much as you can about the market before you invest. Your hard money lender certainly will.

4. Set Aside Cash Reserves

Many first-time real estate investors have approached that first deal without enough cash in reserve. This is a mistake. Perhaps it is due to decades of self-proclaimed property investors convincing people that they can make big money without spending a dime of their own. It is just not true.

A hard money lender might offer you enough to purchase that property when combined with your own down payment. But keeping extra cash in reserve meets those unexpected financial needs that always come up. Without enough in reserve, you could find yourself in big trouble after the deal goes through.

5. Find a Good Lender

As a real estate investor, you are going to be working with lenders for a long time. It is in your best interest to find one with whom you can work well. Work on establishing and nurturing a relationship so that you and your lender are always on the same page. You will find that working with a lender you can trust makes investing in real estate a lot easier.

There are never guarantees with any type of investment. Yet history proves real estate as one of the most stable and profitable investments over time. If you are just getting into real estate investments, welcome aboard. Remember that risk is your enemy. Mitigate it as much as possible.