Determining Your Risk Tolerance

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A very important question you need to ask yourself is, “What is my risk tolerance?”

So many people evaluating a project find themselves unable to move forward for any number of reasons. Most commonly, they will find themselves undermining their own success, out of fear that the project will not work out. With this in mind, it’s incredibly valuable to determine your true risk tolerance.

Some questions to ask yourself to help determine your risk tolerance are:

  • Can you support a negative cash flow? If yes, through what means and for how long?
  • How much money do you think you need to invest in Commercial Real Estate?
  • How much total money are you willing to invest?
  • How much of your own money are you comfortable investing?
  • Do you believe you can do this?

Now, traditionally speaking, people think that if you've got your money invested in a property and the market changes, you’re not the one who’s exposed to the risk. That’s really not the case. You’re the one who’s exposed to all the risk because it’s your money in the property. So your risk tolerance is important.

If you’re someone who is going out and borrowing the money, one important thing to realize is you’re probably going to have to be guarantying that money. It does not matter whether the money is being borrowed from the bank, an individual investor, a family member, or a financial partner. So maybe it’s not your money on the line, but you’re still responsible for it. Your reputation (which is VERY important when investing in commercial real estate) is on the line.

Risk tolerance is also a factor in determining whether or not to go into low income areas where there can be a lot more management concerns. You have a lot more opportunities to lose money through bad management, but you can experience heavier cash flows along the way. So for a little money in and heavy returns through cash flow, low income areas can be outstanding opportunities.

When it comes time to sell properties in low income areas, it typically has been a slower market to get those properties sold. However, if you understand your strategies going in and coming out of the transaction, and you’re comfortable with your risk tolerance, you’re going to analyze the transaction with all of these points in mind.

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