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How to Mitigate Risk

There is always risk involved when investing. However, we believe that because of these risk mitigation strategies that investing in Commercial Real Estate is much safer than investing in the stock market.

Here are a few strategies that we seek to implement to mitigate the risk for our investors.

  • ALWAYS buy at wholesale prices –Understand that you must dig to find the gold. There are hundreds of properties out there, but most are not “good deals”. Keep looking to find the gold. CREATE appreciation though the value-add process – Most “good deals” aren’t found, but they are created. Improving the property in order to increase rents will increase the cash flow and the value of the property. Look for these opportunities and have a value-add plan. Buy for CASH FLOW – Don’t get caught up in how pretty the picture looks. Focus on the numbers and make sure that the asset produces cash each month. Furthermore, ensure that within a short-time frame positive cash flow is achieved. NEVER speculate – Buying assets because you hope that something will happen is a risky strategy. Things change all the time. Make sure the deal works without waiting/hoping something else major happens. Stick to class A, B & C+ areas – D areas (also known as warzones) are a recipe for disaster and headaches. Proceed in those areas with caution. Complete ALL due diligence – It is always better to know what you are getting into so that you can plan accordingly. Being surprised with an additional expense or future headache is never good. Ignorance is expensive. STRESS the underwriting – Always run the numbers with the least favorable underwriting. In the event that obtaining the great interest rate or the extended terms comes to pass then that will be a bonus. Plan for the worst and evaluate the deal as such. Try to KILL the deal – Instead of trying to find ways that make a deal work (if, if, if), look for ways in which the deal won’t work. If you can’t find many scenarios in which the deal will die, then you have a good deal. Obtain FAVORABLE financing terms – Always look at different financing options. Secure the longest term you can get, avoid pre-payment penalties where you can, and get creative with the seller. Favorable financing terms can add extra breathing room to a deal. CASH OUT investors quickly – Having investor money in a deal is expensive in many ways. In addition to the preferred return or interest payment, investor cash in a deal slows down the velocity of money. Cashing investors out as quick as possible, creates happy investors and frees up capital to be utilized again. Have multiple EXIT STRATEGIES – If the plan is to acquire, stabilize and quickly sell to a REIT (Real Estate Investment Trust), you might want a backup plan. Dealing with large, sophisticated funds is highly nuanced. Have various back up plans. I tend to like the buy and hold plan as option #1.

Utilizing these strategies can help mitigate the risk that comes with investing in commercial real estate. Cash flowing physical assets are some of the safest investments around. However, like all things, there is risk involved and caution should be exercised.

Make the wise decision!

Jay Kennedy

Sovereign Sage

Commercial Real Estate Investor

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