Overcoming unknowns in apartment investing
It is natural of us to fear the unknown. This fear is one way we use our instinctive behavior to measure risk. The more fear we have, the more risk we perceive. This fear also directs us away from making a potentially profitable decision. So how do we conquer that fear?
The more we know about a decision, the more confidence we have in making it. Real estate, especially multifamily commercial real estate, is no exception and has many things that could derail the best laid plans. One of the key activities of a sponsor is to identify as many risks of an opportunity as possible to fully inform investors for their own decision process.
Risk is not something to fear. We all make risk decisions daily in all aspects of our lives. Crossing a street kicks in our most basic and natural risk making decision process. It seems obvious that we shouldn’t cross a street with oncoming traffic, but there is a very small chance that we could make the decision to cross a busy street and still not get obliterated by a speeding car. It’s most likely that people of a sound mind won’t make such a mistake. The odds are definitely in your favor to wait until there is no oncoming traffic before crossing.
To break down that decision, we follow a fundamental decision making strategy that helps us assess a risk and decide what to do next. First, observation. Is there oncoming traffic or not? This is critical in our decision process and something we can’t overlook. In the most important decisions made (going to war, raise interest rates, steer clear of an obstacle in the road, invest our hard earned money), research is conducted to gather information that helps us make the right decision. We can think of many cases where not enough research is made and decisions become a gamble; maybe you get lucky. But when we are putting down hard earned money for an investment, the wise approach is to be fully informed before making that decision.
Once enough information is gathered, the next step is to evaluate the information intelligently. One way to do this is to compare it with other successful results and use those lessons learned. We can expect similar results to similar decisions given similar circumstances. This is a key component to making an informed decision. If we see that similar circumstances resulted in a bad conclusion, the wise decision would be to not repeat those actions. However, if we learn that the results could have dramatically changed if a few alternative steps were taken, we may choose to make the same decision but with those key steps to turn a bad conclusion into a good conclusion. This can turn a risk into an opportunity and is always something worth looking for. The Apartment Engineer blog attempts to find those nuggets of opportunity amidst the abundance of risk in apartment deals and share them with the community.
Several details of an apartment community should be researched before making the decision to invest. They include history of earned income, expenses, depreciation, quality of the improvements, quality of the tenants, etc. Additionally, we want to know where the property is located to ensure that a strong market exists. We need to team up with experienced professionals that have knowledge and success with decision making within their area of expertise. Once a consensus can be made with the team that the investment will be a good opportunity with high chances of success, an informed and confident decision can be made. Repeating this action develops best practices that can ensure a long term successful strategy of investing.
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How do you manage risk on your real estate deals?
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