Managing the risk of your properties

[Peter Tverdov]

I always enjoy reading the passion, creativity and energy a lot of people have on here but I don't often read about the downside risk that is very real in REI. I was just curious - how many people do a risk management analysis of their properties or living situation? Can you handle a vacancy? How many months? What if you lose your job? What if your wife loses her job? What if rent prices drop? Etc. I think this is very important for people to do, to avoid being over leveraged and caught naked when the storm comes (and it always comes).

I recently did an analysis of what I own right now and I'm happy to see the overall value of my portfolio in the 70s percentage wise when it comes to LTV (which is good for me considering what I put down) and I am also happy to see what my net operating income would look like if rents dropped 10%, 20%, 30% or 40% so I know where my "uh oh" line will be.

In my experience when bubbles pop or corrections happen, they can happen hard and if you're not prepared or living in a fantasy land you could lose everything you worked hard for. I don't want that to happen personally (and I might not be conservative enough here), but just curious what other people do from a risk management perspective when it comes to their portfolio? 

[Brian Pleshek]

I am a buy and hold investor in Cincinnati, Ohio.  I have no debts outside $35k on a mortgage on a rental.  My personal property is paid for.  Another rental is paid for.  Both were cash deals.  No cars, no credit cards, etc.  To manage risk you either have to have the cash reserves or have the income.  Whoever you borrow from to make your deal won't care that your tenant moved out.  And tenants will move out.  And they will leave your place trashed some times.  If you cannot afford to pay for it yourself either with personal cash flow or reserves, then you cannot afford a deal.  My personal risk tolerance won't allow it.  Now once you start having 3, 4, 5 or more properties, then it's possible that the cash flow from all of those might cover if one goes unrented.  But if you're one of these people who like to see $100/unit cashflow positive and you're dealing in duplexes, then you'll have to own a lot of properties to have the other ones cash flow the vacant one.  Personally, i'd like to have 3-6 months expenses per property in case of problems.  If you start having scores of properties, then you've got protection in numbers and can maybe cut back on that somewhat.

Brian