After a year or so of active investing and deal-making, what I have decided is important is limiting the downside risk. When trading stocks, one limits downside risk by selling when things go below a certain price. For example, head and shoulder or cup formations are looked at on technical charts.
In real estate and private busiesses, there are few specific technical charts to study. Real estate is an extremely regional phenomenon and data are often not available, other than walking the streets intelligence. Must be why most investors stick to their backyards!
My strategy now is to not only hope for the upside, but really work on limiting the downside. For example, take vacancy loss. A non-performing property can cost thousands of dollars a month and wipe out cash flow for months or years.
One possible solution to this problem is to partner on most deals. Then even if vacancies are present, less is being absorbed by each investor than would be individually. However, all investors can still partake in the upside when it happens.
The transaction costs for real estate and private businesses are quite high. Thus, I now believe partnerships (with reliable, honest) partners is the way to go.
Your thoughts?
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3 comments:
Hi Reenu,
The points you make are very valid and you render sound advice. The first investment property I ever purchased was with a partner to reduce my risk of loss. I had known this friend for over 15 years and I trusted him completely as he trusted me. I shouldered more of the load than he did, but that's because that is my personality. It turned out great for both of us because the parameters were defined for each person and that is key when partnering with someone.
Hello - who posted, may I ask?
Yes, glad you had a good experience partnering. Sounds like you maneuver wisely and profitably.
I had a partnership gone sour earlier this year. My partner was not able to come up with his half of the money for a deal we had going on. So now the situation is that he has his name on the title and the mortgage for the property, but has surrendered no money. I was floating him, based on his word, however he wasn't forthright with me in the end. He chose to avoid and run rather than face things and try to set them right. It's a huge headache for me now to re-do the loan. I'm having to chase him for paperwork to get his name off the title. He's a real piece of work.
Anyway, that said, I have heard of many partnerships gone sour too. It's so important to make sure your partner is a good one.
A friend of mine mentioned to me his strategy about letting others go first and being ever so many steps behind them. If the deal works, there is always time to get in later. This cautious approach appeals to me more now than the gung-ho one.
I do not know whether it's just me or if perhaps everybody else encountering problems with your blog. It seems like some of the text in your posts are running off the screen. Can somebody else please provide feedback and let me know if this is happening to them as well? This may be a problem with my web browser because I've had this happen previously.
Cheers
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