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Real estate investing, like any other investment, is a balancing act between risk and reward. There are several strategies involved in it that fall along a continuum of risk/reward ratios, from the flipping madness of the early 2000s to the current "grab properties in distress and wait" focus of the current real estate punditry.
Now, there is a lot of truth to the statement that when prices are going down, the time to buy is right even if you don't get them right at the bottom, if you get them near to the bottom, you're in a good position. (And for reference, think of the people who bought into the market in the third quarter of 2007)
Even so, a proper risk assessment should be done on any real estate investment. There are critical questions you should ask yourself.
The first is the "gloom and doom" financial case what's the worst case that can happen to you as a result of hitting a particular deal? Do you have partners that run the risk of default or who are overextended?
The second is the "death and taxes" level of legal liability. How much legal liability is entailed in taking on a particular deal? Read your contracts carefully, have your attorney go over them, looking for loopholes within them.
As an investor in real estate, especially if you're the lead investor, you have an ethical obligation to accurately assess your risks, and then take appropriate precautions to minimize them. Make the risks smaller by taking realistic perspectives on deals investing in commercial real estate when the job market is pulling out of a town may not be the best way to handle it. Looking for "gotchas" in deals (like environmental impact assessments) is how you cover your behind and the behinds of the investors you're working with.
In all cases, do proper diligence. Nothing wrecks real estate deals like overlooked research; worse yet, overlooked research bites you in the behind AFTER money has been sunk into the project. Due diligence means paying for proper advisors and then LISTENING to them. The advisor's job is to tell you when you're about to do something stupid. They are there to ferret out worst-case situations for you and bring them to your attention. Most real estate investors fail to minimize risk by playing on their gut rather than getting a second opinion. You'd get second and third opinions on a toaster, why not on an office building that'll cost you a million dollars or more?
Be willing to play "catch and release" with a deal. Be patient. Don't just jump on a deal because you've got money burning in your pocket, or because it's a "limited time offer". If it's really a limited time offer, odds are it's someone with a lemon they're trying to unload. Real estate is a game of patience and development.
Combining due diligence on research with catch and release as an exit strategy gives you the most flexibility possible for deciding which deals you need to take, and which you should pass on.
About The Author: James Janel is the Executive Director of the National Association of Commercial Real Estate Property Scouts. He is a Professional Property Scout, as well as an experienced commercial real estate investor. To find out more about property scouting and real estate investing, or to request our free report, Prospecting for Profits: Turning Dirt into Cash, go to http://www.NACREPS.org.
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