#1 Item new investors Neglect when Analyzing Deals

[Bryan Reid]

With all the focus I see on calculating investment returns, something I consistently see missing in the analysis is: RISK.

There are two sides to consider when analyzing any investment: Risk and Return.

As a community, we do a good job (and BP's tools help here) at predicting our potential returns.  But very rarely do I see these analyses tempered by any effort to quantify the risk side of the equation.

I like to perform a simplified risk analysis as described in linked article, as well as running multiple return analyses with progressively bleaker assumptions.

But I'd be very curious to hear what others think/do, too - how do you consider risk?

Am I being overly cautious in my approach?

[Andrew Johnson]

@Bryan Reid I look at risk differently because I'm buy-and-hold.  From my perspective it's about the property being able to self-support.  What if expenses increase 50%?  What if I have to drop rents 20%?  How many vacant units can I have and still pay the mortgage without coming out of pocket?  It gets more "fun" with commercial properties that have 5 to 7 year fixed rates with a balloon at the end of it.  You have to think about refinancing at that point, servicing the new debt, etc.  Then you have to marry the risk (read: high debt) with the tax consequences (less mortgage interest to use against property income).  There's no free lunch.