Evaluating Risk Thoughtfully

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Let’s be honest, as humans we tend to invest a lot of our energy worrying. What are we worrying about? Often times it’s risk. And as real estate investors, we think about risk a lot—what is the risk of this deal I’m doing, or in my investment strategy, or in choosing Property A over Property B? But what exactly is risk? And how should we develop a responsible perspective on risk, so that we consider it appropriately without letting it paralyze us? In this episode, Jeff discusses the two big categories of risk we need to consider, and asks the question, “what type of risk do you want?”

Episode Transcript

What do you feel like is the number one thing that we tend to worry about in real estate investing, I would say probably falls under the general heading of the word risk. And of course, anytime we’re talking about investments we need to consider risk it has to be factored into our decisions. But what is risk? In this episode, I want to talk with you a little bit about different ways to think about risk, what it is and how you should factor it into your decision making. So let’s keep the theme song let’s jump right into this.

Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Thanks so much for joining me for another episode of Racking Up Rentals. Show Notes for this episode are at thoughtfulre.com/e108. Please do us a big favor by hitting the subscribe button in your podcast app. It really helps other fellow thoughtful real estate entrepreneurs to find this show. I’m honored with today’s episode, everybody’s favorite topic: risk. Well, okay, maybe that’s not everybody’s favorite topic. But it’s obviously an important topic, when we are talking about things like investments, and we have to consider risk. But I think a lot of times our thoughts about risk are a little bit on the one dimensional side of things. So in this episode, my goal is simply to share some different thoughts with you. It’s not to pretend like I’ve got all the answers, it’s to hopefully maybe get your thoughts get your wheels turning in a slightly different way than maybe they have turned on this topic of risk in the past.

So we talk about risk a lot. But let’s just first kind of step back and say, Well, what is risk? I mean, in many ways, I feel like that’s the thesis for this episode. What is risk? And I would say answering that question is not simple. There are a lot of different things that risk can be I think we have to go beyond just the notion that risk is all about whether you are speculating or investing, I’d say that’s an important part of the conversation as well. But there’s a lot more to it than that. So my hope here is to just give you some expansive ideas on risk on different types of risk, and maybe how to think about it.

So as I was kind of outlining my notes for what I wanted to talk with you about here today, I found myself with two big headers: investment risk and lifestyle risk. So let’s just dive into each of these. Now some of these things are going to be very familiar to you, right, some of these things are what you might already be thinking about. But then some of them I think might be a little different than what you are thinking about, as well. So let’s just list out a few of these things that we can discuss and consider.

So when I think about investment risk, first and foremost, you know, there’s one type of risk that is really kind of about asset classes, right? Some people might perceive one type of asset class being riskier than another, some might perceive commercial real estate in the office space to be more risky than residential housing, or somebody might perceive storage units to be more risky than industrial warehouses, which would be similar but different. So you could perceive risk on kind of property type kind of a basis, you might consider risk as real estate in relation to other types of investments like stock market, or cryptocurrency or precious metals or any other thing like that. So somebody might look at this and say, well, investment risk is real estate versus other things. Other people might look at it and say, well, risk actually is more about what type of deals you’re doing, right? And if you know what you’re doing, there’s less risk than if you don’t know what you’re doing. And so well, you know, the first time you flip a house, there’s a certain amount of risk, then there’s less the next time and there’s less the 45th time after that. Or they might say well, you know, flipping houses is less risky than rentals because you get rid of the property quick but other people might look at it and say the exact opposite. They might say owning rentals is less risky than flipping houses because you don’t have to worry about the market changing so quickly. Some people will look at markets themselves and say, well, real estate is not risky in a place like Des Moines, Iowa, but it is in New York City. Or they might say no, it’s way safer in a big metropolis like Miami than a small rural place, like a little town in Arkansas, for instance.

Some people might look at risk and say, well, there’s legal risk, right? You know, some states have really oppressive landlord tenant laws, and others are much more landlord friendly, different types of risks along those lines, some might look at risk and say, Well, you know, when you do short term rentals, you generate more revenue. But there’s higher risk because the short term rental vacation rental laws in each town vary, and they could change on you. Whereas long term rentals safer but other people say no, no, there’s more risk in long term rentals, because you’ve got landlord tenant laws, versus short term rentals when you don’t have to deal with that kind of stuff.

So there are a lot of different perspectives on risk. And you can almost make an argument for both sides of the coin in any of these types of topics, right, then there’s another type of investment risk, which is the risk of opportunity cost, the risk that when you buy property A, that means you’re probably not buying property B, or when you tie up some funds in a flip, that means when the perfect rental comes along next week, you know, you don’t have the money, resources, bandwidth, energy, whatever, to take down that deal. Well, or if I buy this rental property, what if a better one comes along soon. So then there’s this sort of risk of opportunity cost, there’s, it’s not so much the risk of what you’re doing, it’s the risk of what you won’t be able to do in the future if you do something else today.

So even within the category of investment risks, you know, you can see people making an argument in lots of different ways that they don’t all see it as the same thing. Some people see certain things as risky, and other people see those exact same things as the safest thing in the world. So how do you get your head around risk?

Well, before we talk about that, let’s talk about the other category of risk that I identified here, which I’m going to call lifestyle risk. Okay, so I talked to a lot of people who say that they ultimately want to become full time real estate, investors. And when I asked them, well, if that’s what you want to do, how come you haven’t done it? yet? Most times, I hear an answer that says, Well, my cash flow from my real estate does not meet my living expenses yet, so I can’t become a full time real estate entrepreneur. And when I hear that, I kind of scratch my head and say, Well, that sounds like you want to quit your job. So you can retire on real estate. But what I was really asking you is, why don’t you become a full time real estate entrepreneur where you’re actually actively working in your business? And as I listened to those answers, I hear people talk about the risk of not making ends meet. What if I can’t make enough money each month to pay the bills put food on the table for my family? What about the risk? If I go full time and quit the safety of my job of failure? What if it doesn’t work? What if I’m a failure? What if I can’t make enough money? What if I go belly up? What if I lose money? What if I make a mistake, and I lose something as a result of that maybe I lose money as a result of that maybe I lose face, you know, I lose status, I lose credibility as a result of making a mistake. So there’s all these people who want to go full time as real estate entrepreneurs, but they feel a lot of risk in that decision.

Let me give you a totally different type of perspective on risk, though, in this category of lifestyle risk. And this is way more how I personally think I risk I fear, the risk of regret. I fear their risk of living small, and playing it safe and wondering what I could have done. I’ll tell you my greatest fear in life is getting to the last moment of my life when I’m about to die, and feeling like I didn’t fully explore my full potential. That to me is, is risk. There’s risk in being dependent on a job and being dependent on an employer. That’s a different perspective on risk than the people who are afraid to leave the job, for fear of the risk of not making ends meet or failing etc. The opposite of that is the fear of risk of being dependent on an employer rather than being self-sufficient and being resilient for me personally, really being reliant on an employer, to me feels like the most risky thing that I could possibly do. Because then I’m putting all my eggs in their basket, I’m, I’m relying on them to take care of me, I’m at the beck and call or the whim of them and my prosperity is now not in my control, it’s in primarily in the hands of somebody else. And that makes me feel really uncomfortable.

So to me, that idea of having a job is actually extremely, extremely risky. You know, in entrepreneurship, there is an expression of eat what you kill, sometimes it’s used in the context of sales, eat what you kill, if you need to eat something, you’re gonna have to go out in the woods and find something that you can capture and bring back to eat. And if you’re really good at killing things, you always have a lot to eat. But if you’re not so good at being self-sufficient, and going out into the world to fend for yourself, and bring home something that you can eat, then you are going to go hungry. But for some people, they would perceive the risk of leaving the safety of a job to go full time as being very, very risky. Other people would feel exactly the opposite, that having a job is risky, because it holds them back from self-sufficiency, etc.

So what is risk? I mean, what I feel like I’ve done here is painted a picture of how you have this topic of risk, but realize that if you ask 100 different people, what risk is they’re gonna have a lot of different answers. And two people might look at the exact same thing and perceive the risk in 180 degree different types of ways. So what is risk? Well, I made up my own definition, I considered googling it, I was curious kind of what, you know, Webster’s might say the definition of risk is, and I didn’t even look, because as I thought about it, I decided for myself risk is the cost of making the decision you make. And there is always a cost, right? Because if you make the decision to not change, you risk what you could miss out on. If you make the decision to change, you risk it not going perfectly. If you make the decision to invest in this, it might not go well. And that means you can’t invest in the other thing. So to me, risk is the cost of making the decision you make. And there’s always a cost.

So here’s my key takeaway for you. And then I’ll share a personal insight for myself. My key takeaway for you is to simply ask yourself the question, which risk do you want? Because you get to choose I think most of the time, we think about risk in terms of how can I avoid risk, I don’t think there’s any avoidance of risk there is simply choosing different types of risk. And the good news is you get to choose, there is risk in everything, there’s risk even in doing nothing. Because even if you do nothing, there’s a risk of the opportunity cost of doing nothing staying where you are means you could be missing out on some other great opportunity. There’s risk in everything. So we’re not playing a game of risk elimination, we’re playing a game of thoughtful risk selection. So choose your risk, whether you’re talking about investment risk, or lifestyle risk, just choose it with intentionality, be thoughtful about choosing which risk you want. And you can’t make the wrong decision. If you’re choosing it thoughtfully and carefully.

As I reflect on my life, I’ll share with you this personal insight about me. I have, to a great extent, feared the risk of regret, and not exploring my potential. I have not put much energy at all into fearing the risk of losing money, or fearing the risk of spending money. Because I feel like I can always get more of those. If I need to at least it’s possible. I might not know how but at least it’s possible. I have not put much weight in the risk of losing money. Maybe I should more than I have. I don’t know. But I can tell you, I’ve put a lot of energy into fearing the risk of regret. Not hardly any interfering the risk of losing money. But I’ve also not put enough fear into the risk of losing time. When I look back on the last say 20 years, I feel like I’ve been maybe a little too casual with how I spent my time with how I have not maybe let it be as precious and finite as it as it is because I can’t get any more time I can always get more money, which is why I guess I don’t fear losing it. But I can’t get any more time. So as I look at that, I say well, I wish I had more fear, more consciousness of the risk of losing time, because I think I’ve been too willing to waste it.

So if you had to answer those three questions, what would your answers be? What have you put a lot of weight into fearing the risk of what have you not put hardly any weight interfering the risk of and what do you feel like maybe you haven’t put enough weight into the fear and the risk of? I hope this conversation while it’s very philosophical, not really specifically about real estate, although we’ve kind of talked a little bit about different types of deals and thoughts about real estate and investment risk. It’s really more about your perception of how you’re living your life. I don’t have all the answers for you, I probably don’t even have a tiny fraction of the answers for you. But I do hope to provide you with some thought provoking ideas and questions to ask yourself because I don’t think there’s any finish line to asking ourselves these questions and continually processing these important topics that dictate how we lead our lives.

So that’s it for today’s episode of Racking Up Rentals. I really appreciate you being here again; again, show notes here are at thoughtfulre.com/e108. Please do us a big favor by hitting the subscribe button in your podcast app, and rating and reviewing the show. Also, we would love to have you join us in our Facebook group for Thoughtful Real Estate Entrepreneurs. It’s called Rental Portfolio Wealth Builders. Just go search Facebook for that we’d love to have you join us there or you can just type group.thoughtfulre.com into your browser and you’ll be taken right there. If you liked this episode, and I sure hope you did, please take a screenshot of it and post that to Instagram; we are @thoughtfulrealestate and we’d love to have you tag us there. Alright, I’ll see you in the next episode. Until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.

Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember: solve the person to unlock the deal and solve the financing to unlock the profits.

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