There is no such thing as a risk-free investment. Some deals carry more risk than others, but every deal has some potential level of risk. The best real estate investors are not only aware of the risks but take measures to mitigate it. This is where asset protection comes to play. If you don’t know what you are walking into there is a good chance you will make the problem worse. Before long, you will be facing an uphill battle just to scratch out a small profit, or even take a loss. Fortunately, there are many things you can do both before and after you agree to a deal to greatly reduce your downside. These seemingly minor actions are critical not only for piece of mind, but for your bottom line. Here are five things every investor can do to protect themselves on their next deal.
- Buy in solid markets. The idea of buying in good investing markets cannot be understated. The importance of location is one of the oldest clichés in the business, but it remains true. A property in a thriving market holds its value longer and for a higher upside than a property in a declining one. With a solid market you are much more likely to sell for your price, have the option of renting or realize future appreciation. A good market doesn’t always give you the grand slam profit you are looking for, but it rarely will cause you to take a loss. As any experienced investor can tell you, a small profit is always better than a small loss. On the flip side, speculating on a low-priced property in a bad part of town may sound great on the surface, but doesn’t offer much protection. These properties are often boom or bust, with very little room in between.
- Buy at your price. Your goal as an investor isn’t to simply accumulate properties for your portfolio. You want to acquire real estate where you can realize a return on your investment at some point down the road. To get the return you desire, you need to buy at you price. A few thousand dollars may not seem like much, but it often sets the wheels for a price war in motion. The minute you go over your “walk away” number there is no telling where you may stop. Before long, you end up doing whatever it takes to get the property, even if it means overpaying. At that point you need to make concessions or cut corners to make up for the price and that leads to poor work and ultimately a reduced sales price. As hard as it is, you must stay disciplined and buy only at price points you are comfortable with. If not, you set the wheels in motion for a risky project where everything has to go right for you to get the return you desire.
- Listen to attorney. If you are going to enlist the services of an attorney, you would be wise to listen to them. Two of the most common problem areas in the transaction are with the contract and the title. Just one snag in either area can set the wheels in motion for a risk filled transaction. Just as the case with the purchase price, you need to know there are other deals out there. If your attorney finds something they don’t like with the contract you need to listen. Even if you are an experienced investor, your attorney knows more about the contract than you do. There are sellers our there who will try to get something by you that can be an expensive and time-consuming fix down the road. If there is doubt, it needs to be addressed before getting too far. The same is the case with title insurance. Always spend the money to ensure that your have a clean title. 95% of all transactions come with a clean title, but you don’t want to be in the 5% that is not.
- Inspection. The inspection is there to offer protection after the contracts are signed. Unless you plan on gutting the property and starting from scratch, the inspection is critical. The goal isn’t to simply get someone out there so you can move forward. You need to see if there are any red flags that could be potential problems. Listen to your inspector and read their report. If they say that there could be an issue down the road with the foundation you need to take it seriously. Looking at the property with rose colored glasses will only open the door to costly remedies down the road.
- Always have an exit strategy. The properties with limited exit strategies are always the riskiest. Putting all your eggs in a rehab property can leave you stuck if it doesn’t sell. In a perfect world you would have the fall back option of renting for a year and seeing where the market is. Where many investors get in trouble is by not thinking of the worst-case scenario. They just assume everything will go off without a hitch and when it doesn’t they are paralyzed to act. Because they haven’t considered this scenario they don’t know what to do, which causes panic and poor decisions. Before even making an offer, you should have a plan A, B and C firmly in place.
Getting involved in a bad deal can set your business back months. There is always risk, but always take precautions to mitigate that risk on every transaction you are part of.