What happens if things go bad?

Jan 05, 2010

Ah, great real estate risk assessment question
by: Tom Karadza

Hi Steve,

Great question.

It's important to set context before with this one. Risk with real estate applies to every category and every strategy.

Student rentals may have a University put up a massive new residence building.

Apartment buildings may have $250,000 in unexpected underground parking repairs.

You get the idea.

With single family homes you need to be comfortable that you'll be able to rent out your property for acceptable cash flow in any environment.

Once you've established that then you can get advanced and implement lease/option strategies on them.

Property and community fundamentals come first. Always.

That way if property values change (up/down) you always feel good because you bought a property that you know you can rent out anytime (there are always people looking to rent).

And if the current tenant doesn't pay you your rent you can move on and get a new one (by the way, in your example, tenants must pay the higher than average rent that you mention because it's in their lease - they can't decide not to).

Also, for lease/options there are always two sides. We know investors who are had to give up equity because the property appreciated past the set buy out price. We know others that had to agreed to reduce their price (although they didn't have to) to sell their property but still made a profit b/c of accumulated monthly cash flow and equity build-up.

As for U.S. investors, we know some who got carried away and bought "not so nice properties" because they were good deals and they've seen their prices drop. Interestingly they can still find tenants for them. We know others who bought in good areas and have had stable prices. So it's case buy case. Once nice thing about lease/options is that you as the investor are in control.

To summarize quickly, it all starts with the property.

Find a property that you like. Focus on a good area.

And if you decide through your own education that you'll rent out that property for an acceptable amount in any economic environment - then chances are you've found a winner.

Hope that helps a little!

Tom.

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Jan 05, 2010
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Submitted by: Tom Karadza

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Hi Steve, Great question. It's important to set context before with this one. Risk with real estate applies to every category and every strategy. Student rentals may have a University put up a massive new residence building. Apartment buildings may have $250,000 in unexpected underground parking repairs. You get the idea. With single family homes you need to be comfortable that you'll be able to rent out your property for acceptable cash flow in any environment. Once you've established that then you can get advanced and implement lease/option strategies on them. Property and community fundamentals come first. Always. That way if property values change (up/down) you always feel good because you bought a property that you know you can rent out anytime (there are always people looking to rent). And if the current tenant doesn't pay you your rent you can move on and get a new one (by the way, in your example, tenants must pay the higher than average rent that you mention because it's in their lease - they can't decide not to). Also, for lease/options there are always two sides. We know investors who are had to give up equity because the property appreciated past the set buy out price. We know others that had to agreed to reduce their price (although they didn't have to) to sell their property but still made a profit b/c of accumulated monthly cash flow and equity build-up. As for U.S. investors, we know some who got carried away and bought "not so nice properties" because they were good deals and they've seen their prices drop. Interestingly they can still find tenants for them. We know others who bought in good areas and have had stable prices. So it's case buy case. Once nice thing about lease/options is that you as the investor are in control. To summarize quickly, it all starts with the property. Find a property that you like. Focus on a good area. And if you decide through your own education that you'll rent out that property for an acceptable amount in any economic environment - then chances are you've found a winner. Hope that helps a little! Tom.

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