Real Estate Investing Risks

[Edward A.]

Caught up on some reading this weekend and I checked out the book the Millionaire Real Estate Investor - written in 2005. A great book and very inspiring to read. What I am curious about and it raised an interesting question for me was assuming you read this book in 2005 and got very excited about real estate and started investing then the market downturn a few years later - where are you now? Did you manage to get through this downturn? The reason I am asking is that I am starting out to invest and may make my first purchase soon. I am reviewing my risks, costs, etc. and although my guess is real estate is more stable these days you never know. But, I want a plan for the long term and am curious about what strategies help a REI weather the bad times?

[Account Closed]

You know, I saw alot of my fellow real estate investors leave the market during the RE crash.  The thing is, most of us did not foresee the severity of what took place.  Buying right to begin with helps, but if your values drop 50% there's a good possibility that you didn't buy cheap enough.  Thinking about some of the things I saw then, I'd say leverage is a key factor in surviving bad times.  Usually everyone wants to leverage as much as possible because it amplifies your return in a good market.  So buying at discounts, using lower leverage will help.  When prices dropped I had very little leverage.  I lost some of my net worth.  But it was amazing how many of the landlords around me went out of business, lost their property.  Another thing that happened in my area was that rents were under pressure for a while.  Since my leverage was low, I was able to lower my rents slightly to keep my places full.  That becomes more difficult when you're highly leveraged.

I think you should be applauded for looking at your risks.  Just remember that if you don't see a risk, you just haven't thought about it enough.  That's not intended you scare you off, just to make the point that if you can determine all your risks on a particular deal, then you can determine if those are risks that you can live with, and maybe come up with Plans B and C if those problems occur.  One other thing, alot will depend on what type of investing you're doing.  A landlord takes different risks than a wholesaler or rehabber.