For Many, Investing in Real Estate Is Intimidating Because of the Size of Loan and the Personal Risk

Balancing risk with capacity is a critical component of your investing plan. For many, this can be too much to take on an investment. If you are serious about building a real estate portfolio, you shouldn't let this stand in the way. The key is setting up an investment that will create the right balance of risks and rewards. If you can't tolerate the potential loss of an investment, set up a set of conditions that will make this event virtually impossible.

First, take the time to ensure that the purchase you are making is insulated by positive characteristics that will assure the invested value and provide a strong promise of improving future values. This is a matter of ensuring the physical structure can support the trials of time, verifying that the underlying fundamentals of the neighborhood are strongly in favor of the property, planning reserves and capital support to protect the asset from vacancies and to provide the necessary repairs and improvements, and to provide the management to assure a well run highly occupied project. Whether we are dealing with one unit or 100 units, these principals are the place to start.

Second, ensure that the debt position of the project can't place you in a position where you will temporarily or for the long term be unable to support it. This can be accomplished by brute force through an all cash or low leverage investment. Or, you can include partners who are committed to providing cash and or cash flow needed to support the project if a difficult time develops. You might even grant a partner who has plenty of cash an ownership position based on this commitment. This could be quite attractive as they would not have to put up their own capital. This enhancement may also make drawing debt capital for the project much easier. A formal way to accomplish this is to place a standby letter of credit in the project from the supporting investor.

In the end, investors recognizing that projects come with risk must balance their tolerance for that risk with the cash needs of the project. In far too many cases, investors over extend the debt seeking the cashless deal creating unnecessary risk for themselves and often for their partners.

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