How Much Risk Will You Accept in Real Estate Investing?

How much risk do quick flipping profitable deals involve in real estate? This is a hard to answer question, but a good one to ask. Many factors affect risk levels. For example, your experience and expertise have great bearing on what risk you will face. The types of properties you choose also affect risk level.

You have three main reasons to be concerned about the risk of fast turnaround property flipping:

First, what happens if you buy a property, then can't accomplish what you hoped to? You can eliminate the risk of not being able to accomplish your goals by using contingency clauses in your purchase contract. For example, you might say you are not obligated to buy a property unless your loan for building improvements is approved. Contingency clauses all but eliminate one of the three big risks.

Second, what happens if you can't find a buyer for your project when it's completed? Not being able to find a buyer for your project is a possibility you should prepare for. You can overcome this risk by staying away from projects that you must sell later. In other words, if you buy a duplex and convert it to a triplex, be prepared to keep it as rental property if it doesn't sell for a profit. If you box yourself in financially so that a sale is mandatory, you flirt with bankruptcy. Always leave yourself a safe way to offset a slow sale.

Third, what happens if the work being done on your project costs more than it was projected to? Cost overruns are a problem with any type of construction or remodeling. Most overruns can be controlled with proper management. For example, if you rehab a house, make sure the contracts you enter with the people who will do the work detail specifically what will be accomplished and exactly what the work will cost. Have material suppliers lock in quotes for enough time to complete the job. When you budget your money, build in a safety margin to protect against cost overruns. If you do your job right, you can eliminate nearly all of the risk of fast turnaround real estate profits.

In many types of investments, the rewards are related directly to the risk investors take. A safe cash investment in a savings account at a bank will not pay off as much as a high-risk bond. The same principle is true, to some extent, in real estate, but real estate can be made safer. You don't have to be reckless and live in constant risk to make major money in real estate.