Every investment can be thought of in terms of a simple gamble. You’re going to put X on the table and play a game, and you’re going to walk away with Y. If Y is greater than X, you win!
We see risk-takers being lauded as the “movers and shakers” of the world. People who achieve impossible ambitions, who stand up to overwhelming authority or power, or who survive insane circumstances through daring and skill.
But property investment isn’t a heroic endeavor. You’d better have a really solid understanding of risk before you get in on this game, because if you lose, it may not be pretty.
There’s a lot of literature out there referencing the factors that make up a successful property investor (or investment) but far too many of those books (and seminars and websites) don’t ever really delve deeply into calculating risk. They just say “avoid these things,” as though a short list of no-no’s will stand in for a complete risk analysis. Your personal tolerance for risk is THE single most important factor in any real estate investment.
Determining Your Risk Profile
According to Drew Sygit and biggerpockets.com, a person’s risk profile is composed of four elements:
Risk Tolerance– varies from “none” (you can barely afford to invest in the first place, and a loss would directly affect your lifestyle) to “extreme” (you have enough disposable income that you have trouble deciding what to do with it). Most people fall around the “low” category — they could manage if they suddenly lost a few thousand dollars, but that’s about it. In general, you shouldn’t consider real estate as a viable form of investment unless your risk tolerance is at least on the upper edge of “medium.”
Risk Appetite– Risk appetite varies from “none” (you don’t find the prospect of risking money to be in any way exciting) to “YOLO” (you find nothing more engaging than not knowing that you’ll have food or a house at the end of the evening). Again, most people fall into the “low” category. Real estate investment can appeal to any flavor of risk appetite except “none.” If you want low risk, wait and watch until a complete no-brainer shows up, snap it up, and be done. If you want “YOLO” risk, buy everything and pray.
Time Commitment– This is where real estate investing can get really hairy. It’s totally viable for one person to single-handedly landlord for one house while they hold down a full-time job and raise kids. It’s totally viable for a person with literally nothing else to do to single-handedly manage five, maybe six houses — poorly. It is almost impossible to manage your own properties and still be available to study the market and find future investments, but with a great property manager, you will have the time and energy to do both.
Monetary Goal– breaks down into two essential types: You either want to invest because you’re setting up a cash flow, or you want to invest because you’re setting up a nest egg. Both kinds of investment are equally important, and real estate investing can lend itself to either one when set up appropriately.
If you’re interested in investing, then, you need to assess your risk profile, and you need to decide where you fall in the risk categories, and go from there. Oh, and welcome to the world of real estate investing!