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I have been a professional investor for 25 years. I was taught early on that there is no reward without risk and that a true investor INTENTIONALLY manages the risk that she takes. 7 years into my real estate investing career here are a few of my risk management steps.
1) Buy Right
"You make all your money in real estate on the buy" is a common refrain. We are VERY picky on the deals that we do and buying below market can solve a lot of operational mistakes. We refuse to overpay ex ante.
"You make all your money in real estate on the buy" is a common refrain. We are VERY picky on the deals that we do and buying below market can solve a lot of operational mistakes. We refuse to overpay ex ante.
1) cont'd
When you do buy, make sure you have a systematized due diligence process. Audit leases, do a physical inspection (with your contractor), do a phase 1, talk to every tenant that will talk to you.
When you do buy, make sure you have a systematized due diligence process. Audit leases, do a physical inspection (with your contractor), do a phase 1, talk to every tenant that will talk to you.
1) cont'd
Be intellectually honest about the inputs to your underwriting model. How do you know you can achieve those rents? is $500/unit/yr enough repairs and maintenance? how big of a contingency is in your rehab budget? "more fiction has been written in excel than word"
Be intellectually honest about the inputs to your underwriting model. How do you know you can achieve those rents? is $500/unit/yr enough repairs and maintenance? how big of a contingency is in your rehab budget? "more fiction has been written in excel than word"
2) Underwrite your tenants diligently
A bad tenant can make an owners life miserable while a good tenant can make your life easy. We have very strict standards for our tenants pertaining to income, job verification, eviction history and credit.
A bad tenant can make an owners life miserable while a good tenant can make your life easy. We have very strict standards for our tenants pertaining to income, job verification, eviction history and credit.
3) Carry the proper insurance
Make sure you are covered for lost income, general liability and make sure your local natural disaster risk is properly insured. In Colorado, that requires paying up for a lower hail/wind deductible.
Make sure you are covered for lost income, general liability and make sure your local natural disaster risk is properly insured. In Colorado, that requires paying up for a lower hail/wind deductible.
3) cont'd
Make sure all your tenants have PDLW waivers. We write it into our leases and tenants can buy a waiver for a small fee / month. This covers us up to $100k for damage to our buildings caused by tenants. Carries a $250 deductible. Only free money in RE.
Make sure all your tenants have PDLW waivers. We write it into our leases and tenants can buy a waiver for a small fee / month. This covers us up to $100k for damage to our buildings caused by tenants. Carries a $250 deductible. Only free money in RE.
4) Prudent leverage and reserves
Debt is beta, not alpha. When things go wrong, excess leverage can sink you. We underwrite to conservative DSCRs that can weather a 20%+ drop in revenue. Because we are so picky on the deals we do, we can get great returns without excess debt.
Debt is beta, not alpha. When things go wrong, excess leverage can sink you. We underwrite to conservative DSCRs that can weather a 20%+ drop in revenue. Because we are so picky on the deals we do, we can get great returns without excess debt.
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Focus on the debt terms, not just the rate and amount. Make sure your debt aligns with your equity expectations and your business plan. YM prepays can handcuff you if rates fall (refi) or you get a big unsolicited offer to sell (sale).
Focus on the debt terms, not just the rate and amount. Make sure your debt aligns with your equity expectations and your business plan. YM prepays can handcuff you if rates fall (refi) or you get a big unsolicited offer to sell (sale).
5) cont'd
Carry appropriate reserves at the property level. Make sure a boiler replacement is not going to force a capital call. We keep 2-6 months of opex + debt service on hand.
Carry appropriate reserves at the property level. Make sure a boiler replacement is not going to force a capital call. We keep 2-6 months of opex + debt service on hand.
6) Choose your partners wisely
This may be the most important one. A good partner is like a good tenant. Whether it is a business partner, vendor, property manager, bank, capital partner, GP be very careful and clearly document roles, responsibilities and control specifics.
This may be the most important one. A good partner is like a good tenant. Whether it is a business partner, vendor, property manager, bank, capital partner, GP be very careful and clearly document roles, responsibilities and control specifics.
6) cont'd
I have been very fortunate to have great partners that have helped me safely grow our business and develop an investment strategy that has worked well.
I have been very fortunate to have great partners that have helped me safely grow our business and develop an investment strategy that has worked well.
Please feel free to add any MF RE risk management pointers that I may have missed. /fin/
