One question many potential real estate investors have is about risk: how much risk is involved and how do you reduce that risk? While all investing carries some inherent risk, you can often successfully navigate those waters and temper that risk by doing due diligence with research and comprehensive evaluation of the deal. As Abraham Lincoln once said, “Give me six hours to chop down a tree and I’ll spend the first four sharpening the axe.” Preparation is key in any investment scenario. We offer other tips for risk reduction in real estate investment in this edition of the BAM blog…

Choose Your Asset (Class) Wisely

BAM founder, and CEO, Ivan Barratt, has often talked about the BAM philosophy of finding workforce housing to be the best risk-adjusted return of all the real estate asset classes. Workforce housing occupies a special sweet spot among assets; there will always be renters who need this type of housing and it is uniquely poised to ride out an economic downturn, making it a much less risky investment than other asset classes. By maintaining such a steady demand, even if the economy hits a rough patch, this asset is in a much better position than a property like luxury housing. As Ivan has noted, there will always be a large group of the population looking to rent good, safe, appealing, and affordable housing – and workforce housing ideally hits the mark.

A Large Complex Can Mean Less Risk

While it may seem counter-intuitive, by investing in a large complex, you can actually reduce your risk. In actuality, the larger complex has what Ivan calls “economies of scale” – you’ll have the benefits of staff on site, such as managers and maintenance who are able to keep an eye on the property and handle situations promptly. In comparison, owning single, smaller properties can increase your risk: if you have a problem it can really swing your cash flow needle significantly. It’s also more difficult managing regular rental issues and maintenance in smaller properties that may be spread out over distance. By having a larger complex, you effectively can smooth out potential rough spots and reduce risk by having on-site personnel as well as less risk if problems arise.

Reduce Risk Through Interest Rates

Ivan makes a great point: investing in the multifamily industry is the only place you can lock in interest rates for 10, 15, 35, and even 40 years! By locking in interest rates for an extended period, you automatically take a big piece of investment risk right off the table. Ivan has discussed financing with HUD, which contrary to popular belief, finances all asset classes: A,B,C, and D. While requiring plenty of paperwork and follow-up hoops to jump through, their long-term interest rates often make them a terrific source for multifamily and workforce financing. The bottom line is that by utilizing the right financing you can significantly reduce your risk with a locked in interest rate.

The BAM Bottom Line: By choosing multifamily workforce housing, you can significantly reduce your overall investment risk. Finding the right financing for the right property type will take a lot of risk off the table. Performing due diligence beforehand and properly evaluating the deal will also help to mitigate your risk.