All Forum Posts by: Yoni Weisbrod

Thanks a lot @Thomas S.! Any advice you can give to a new RE investor to avoid those kinds of failure situations?

Thanks @Alex Franks, appreciate your perspective!

@Shawn Ackerman Just so we're clear, I'm not denigrating real estate investing at all, just trying to figure out what the realistic risk can be when going all in and how people manage it. And I've gotten some great perspective from a lot of (other) people here.

@Charles Lemelle I strongly believe in understanding the risk level of any potential investment. 

Some investments have risk-adjusted returns that are too high - meaning, the compensation for taking the risk is disproportional to the risk and the investment is speculative. I'm completely new to real estate, so I'm trying to figure out how much risk is involved in gaining solid wealth through REI and whether that risk is fairly compensated.

To me, understanding risk is part of "doing the math" and being an informed investor.

Wouldn't owning 15+ homes just increase the risk of evictions proportionally?

Awesome post @Charles Lemelle, appreciate your perspective. I suspected that there is a large element of risk at play here by virtue of being so highly leveraged.

People have mentioned diversification as a means of reducing risk. As I understand it, diversification works when assets behave differently from one another, reducing the odds that any one type of catastrophe causes a severe loss.

What are some ways that you can diversify in REI? As someone with zero actual experience, here are some things that I've thought of:

1. Vacancy risk - Buy properties in different locations, reducing the risk that unexpected high vacancy rates in one location will affect another. 

2. CapEx risk - Buy properties in different states of distress to diversify away the risk of unexpected capital expenditures.

3. Market price risk - Buy properties in different markets to reduce risk of bubble pops or other price drops in any single market. This would likely be prohibitive for many investors.

4. Credit default risk - You would need multiple income streams that do not highly correlate with the RE market to diversify away this one. Perhaps a full time job + RE investments would count to some extent.

5. Tenant refuses to pay - By avoiding D locations, buying larger properties and screening tenants, you probably avoid much of this risk and having multiple properties in and of itself diversifies risk that remains.

6. Interest rate hike risk - No one knows where rates will go, but they are quite low right now. Having both fixed and variable rate mortgages would diversify, but seems strange to me. Not sure why.

I guess I'm wondering how much diversification is actually used to reduce overall risk in REI in the real world.

Thanks @Jeff B., excellent point about riding out the cyclic market prices.

The argument against riding it out is that a real estate crash could likely be a part of a wider market crisis, potentially involving loss of business income or even loss of a job. In order for you to be able to continue paying multiple mortgages, cash flow from all/most of the units would need to remain constant. I.e., the numbers would need to be very accurate and rental prices couldn't drop much (which seems rare even in crisis). Guess you better be good at estimating expenses.

It seems like there's far less diversification in owning several properties than there is in buying index funds that themselves own thousands of stocks across industries, locations, and capital sizes. With so little diversification and the additional leverage risk (especially with multiple properties), it feels like real estate might be far riskier than long-term index investing. 

I don't think that that's a bad thing necessarily, and it might be the reason why real estate is a serious potential wealth builder, I just want to be clear on the amount of risk I'm taking on before I invest.

It sounds like the common approach is to reduce risk as much as possible by using conservatively calculated financials and keeping significant reserves on hand in case of extreme disaster. But if you buy multiple properties, I would think that it would be very difficult to maintain sufficient reserves to handle disaster scenarios. Maybe I'm wrong :)

I see that it is a common goal for Buy & Hold investors to own several rental properties. Wouldn't having multiple mortgages expose someone to an excessive amount of risk?

Suppose there's a market crash, rental rates fall, house prices fall, and then paying a monthly mortgage payment could prove challenging (not to mention other risks, like unforeseen capital expenditures). This situation would be tough when you own one property - but wouldn't the issue be dangerously compounded with multiple properties?

I realize that people look for properties that are pretty much guaranteed to provide positive cash flow, but I just wonder how much risk is involved before I get started. Is building wealth through real estate risky, plain and simple?

(New member warning!)