How to Best Evaluate Risk vs. Reward


Every decision you make affects your business. Everything from the color you use to paint the living room to what offer you accept makes a huge difference. If you make these decisions based on impulse, you are asking for trouble. Everything you do should focus on risk vs. reward. Is it worth what you are risking for the potential reward you can get? Sometimes your risk will be money, others it will be time. Whatever you are giving up is real and needs to be worth the return for you to move forward. There is nothing wrong with hitting singles on deals, but you need to know what you are risking. There are many areas of real estate to focus on. With each of them, there is an easy way to understand the risk vs. reward.

Rental Properties: Rental properties are a great way to gain long-term wealth. Not every property will be the home run you think it will be. Having a successful rental property requires you to be strong in many different areas. Not only do you need a good property, but you also need to find good tenants for it. All this takes time. Before you consider a rental, you need to ask yourself if you are willing to put the time in. Dealing with tenants before, during and after they move in takes time and patience. You can expect a few false alarm phone calls in the middle of the night. To avoid this, you can hire a property manager, but this will cut into your cash flow. The goal for a rental can either be long term wealth or monthly cash flow. If you have a long term goal, you are risking your money in the hope that you will see a future return. You goal can also be to have monthly cash flow. If you do not want your money tied up for several years, rentals may not be for you. There is the chance at wealth down the road, but for this you will pass up current deals. For the right property the risk is often worth the reward

Flips & Rehabs: Home flipping is currently the most popular form of real estate investing. There are about a dozen shows on TV dedicated to this part of the business. While it may look easy many investors can and do lose money. This often happens when they don’t consider all the risks involved. The most common mistake that rehabbers make is thinking that any work they do add value to the property. If you don’t do the right work you will not get the return you desire. Soon enough you will get to a point that your risk no longer equals your reward. You can still make a profit but to do so you have to put up a large amount of money. You can use this in many different safer ways that can still give you a good return. To rehab a property you need capital to buy and money to rehab. This is often tens of thousands of dollars. After you buy you may not have money for other opportunities that come your way. These can be greater than the project you are working on. Making $10000 may seem like a lot of money but when you are risking $40000 it doesn’t look so great. Even if you know the area you may not be able to sell for the price you think. Every day you own the property without selling your lose chances at other deals. Flipping can offer you quick returns but often takes a large initial investment. If you don’t mind your money invested up for a few months than this approach makes sense.

Wholesale Deals: Wholesale deals are the least risky form of investing. What you may not be giving up with money you give up with time. Wholesaling is process of finding deals and assigning the contract for a fee. The only money you should spend will be for marketing and some due diligence on the property. This may seem risk free but is it worth the reward? Some wholesale deals may take weeks to complete. During this time you can spend several hours putting everything together. In the same time you could have found a rehab or rental deal that would be far more profitable. The risk is not the same but the reward would be much higher. Spending all your time on one deal means you are taking time from somewhere else. Instead of growing your business all your attention is on one deal. You can build a strong wholesale business but it may never reach the heights of a rehab or rental business. The risk will be in line with the rewards.

If you are comfortable with the risk, you should be willing to accept the outcome. It is important to know exactly what you are getting into and giving up with every decision you make. There is nothing wrong with making a small profit on a deal. It becomes a problem when you give up too much to get it. There are many ways to analyze a deal, but risk vs. reward has stood the test of time. You have to know what you are giving up to get something. If you are not comfortable with this, there are other deals you can work on.