How to Calculate and Manage Risk in Uncertain Times

You’ve heard me say it before: systems are necessary to create consistent success. But what systems actually help?

Taking the time to calculate risk in every project and deal you make can save you a lot of hassle and money in the long run, allowing you to reach consistent success.

So, how do you calculate and best manage risk?

Analyze Timelines

In today’s world, you have to calculate the risk for projects by looking at the month- to year-long timelines. We live in a time where delays, shortages, and political changes happening daily affect supply chains and product prices. Consider how changes in product deliveries or installations may change your timeline. When you calculate the estimated time to complete a renovation, also take the time to calculate a timeline if many products are backordered or multiple worse-case scenario delays occur.

Examine Your Supply Chains

I’ve had instances where necessary products have been backordered just for the distributor to end up refunding us and being unable to deliver. By the time we went to buy the product again, prices had increased 50%. One way I have found to lower risk is by investing in products locally instead of internationally. If I have the option to buy a product in South Korea or pay slightly more for a product manufactured in Texas, I will opt to buy the product in Texas because in the worst case scenario, I can always drive to the manufacturing site and pick up the product myself. The pandemic has shown us that shipping from other countries can easily be distrurbed and unpredictable.

Know Your Limits and Ask Questions

In investing, it’s important to know the line at which you will lose money. Then, ask yourself the hard questions. What if there are delays? How will delays impact property taxes, interest values, etc.? What if things cost more? What happens if the rent you receive today doesn’t grow? What if rent goes down? What happens if multiple of these things happen? Think through all the worst case scenario and gage where each scenario may leave you financially, especially if multiple scenarios happen at once. Always keep in mind the percentage return for investors!

Utilize a Checklist

Surgeons utilize checklists. Pilots utilize checklists. Why? Because without it, they may miss something vital and the risk involved can mean life or death. Similarly, utilizing checklists in a commercial real estate deal can be a valuable practice that can keep you from missing an expensive detail in the process. The good news is that checklists are a system that can be used over and over again in multiple deals, so once you’ve created the barebones of one, you can reuse it.

Get Creative and Be Flexible

Not even the best investors or economists can tell you where our economy is exactly going to go. I can only guess that in the next few years, we will experience a distressed market. I truly believe that the individuals who are super involved with their properties and can get creative will rise to the top. Do your due diligence. Make sure you have proper underwriting. When you ensure that you have proper systems in place, you will be able to execute successful deals in the long run.

Want to learn more about calculating and managing risk in real estate? Tune into my episode on the Accelerated Real Estate Investor Podcast!