In a previous post, I reflected on real estate risk and return. Buying “right” is key. I also suggested that price volatility does not equal risk.
I have been thinking a lot about real estate risk lately. Likely as a result of considerable media attention of late, to slow/no growth predictions, and a soft economy.
How do you react to risk?
Have you ever stopped to ponder how you’ve reacted to risk (perceived or real) as a real estate investor? I know I have.
True confession. I still waiver between impatience (I am often quick to act), and reluctance (I can’t seem to pull the trigger). And there doesn’t appear to be any identifiable reason (for me) to fall into one behavior or another.
A number of years ago, with a partner, I negotiated an Agreement of Purchase, on an under-leased partially vacant commercial asset, in under 48 hours from initial inspection. Conversely I wavered and took months to negotiate an Agreement of Purchase on an industrial property. Both investments were successful in the end. The manner in which I perceived risk associated with the transactions, differed considerably.
I consider myself a life long learner. I am a student of real estate for sure, but also continue to learn about myself. My personal experience has generally been that greater real estate investment success comes when I push the envelope and exceed my comfort zone. This is not to say that I recommend you act in haste. Perhaps the message is an encouragement not to fall into the paralysis by analysis trap. We’ve all been there.
Are you standing still?
Taking no decision on an opportunity, is in fact a decision. Intellectually, I know that. I also know, from experience, that inaction is also risky. This was recently underscored by Scott Anthony in the Harvard Business Review article entitled 4 Assumptions About Risk You Shouldn’t Be Making. In it, Anthony states that in today’s rapidly changing world, “standing still leads to falling behind...”. Undoubtedly many of you have had similar experiences when confronted with opportunities. Is it go, or no go?
Perhaps successful real estate investors are not that different from entrepreneurs? They are not necessarily risk-takers, but rather are risk-managers. And what is risk anyway, other than uncertainty?
Knowledge is key
From my personal experience, knowledge is key. And knowledge often accumulates through experience. I’ve learned a thing or two from numerous economic downturns. Strategically located investment real estate historically performs better, and recovers quicker, that real estate in secondary locations. Of course I undertake the required due diligence on the income generating characteristics and building condition. Asset location however, has always informed my real estate acquisition decisions. It will continue to do so.
What are your perceptions? How do you manage risk, and how do you know when you are comfortable enough to go “all-in”? Please share your thoughts.