Risk Management in Private Real Estate: 3 Types of Uncertainty Story

Risk Management in Private Real Estate: 3 Types of Uncertainty

Private real estate investing can be lucrative, but these investments are not without risk. There is a reason the accredited investor status exists.

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You are required to prove you’re in a financial position to absorb a loss before investing in many syndicated and crowdfunded real estate deals.

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One component of risk management in all types of investments is diversification. Let’s see how deals with risk and uncertainty in private real estate.

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Risk Management in Private Real Estate: 3 Types of Uncertainty

Idiosyncratic risks are unique to a project or its underlying real estate. The degree of risk varies from property to property—and while it’s uncertain, it’s not unpredictable.

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Replacement Cost Risk: Newer Is Nicer

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Compare that price to the acquisition price of the target property, plus the capital required for renovation. If these combined values are greater than replacement cost, a competitor could develop new product at a lower cost basis.

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Leverage Risk: When Risk Overtakes Return

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The common mistake that investors make is to think that a deal with 60% leverage—meaning 60% is the bank loan or a loan of any kind—makes just as much sense at 70% leverage.

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Risk Management in Private Real Estate: 3 Types of Uncertainty

Private real estate investing can be lucrative, but these investments are not without risk. There is a reason the accredited investor status exists.

You are required to prove you’re in a financial position to absorb a loss before investing in many syndicated and crowdfunded real estate deals.

One component of risk management in all types of investments is diversification. Let’s see how deals with risk and uncertainty in private real estate.

Risk Management in Private Real Estate: 3 Types of Uncertainty

Idiosyncratic risks are unique to a project or its underlying real estate. The degree of risk varies from property to property—and while it’s uncertain, it’s not unpredictable.

Idiosyncratic Risk: It’s Complicated—and Can Kill Returns

Replacement Cost Risk: Newer Is Nicer

Compare that price to the acquisition price of the target property, plus the capital required for renovation. If these combined values are greater than replacement cost, a competitor could develop new product at a lower cost basis.

Leverage Risk: When Risk Overtakes Return

The common mistake that investors make is to think that a deal with 60% leverage—meaning 60% is the bank loan or a loan of any kind—makes just as much sense at 70% leverage.

SWIPE UP NOW TO READ MORE

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