Understanding Risk as an Investor

The following expertise was shared by Bronson Carpenter, owner, and founder of Borrower Solution – a hard money lending company serving investors across the U.S.

Three types of “risk” that REIs need to understand.

All real estate investments boil down to three major types of risk: construction risk, transaction risk, and financial risk.

Construction (or Renovation) Risk

This can typically be mitigated by working with an accredited, experienced GC, and by completing thorough due diligence (i.e. inspections) of the property to prevent any cost surprises.

Transactional Risk

Transactional risk may include a variety of scenarios where the investor either fails to secure the property, or cannot successfully exit their investment. Understanding how to time the market, how to market the property, the appropriate price to sell the investment at, how to avoid every investors nightmare scenario where their flip doesn’t sell, and having a proper financial advisor are crucial to minimizing transactional risk.

Financial Risk

Financial risk ties closely into transactional risk. If a property is sitting on the market, you have to understand how the loan terms impact investment returns. High-interest rates, unfair upfront fees, and expensive loan terms are too common in real estate investment lending and kill profits. Professionals and advisors understand how to ensure your profits are maximized by minimizing your funding expenses, minimizing the amount of cash investors need to bring to deals, and leveraging industry secrets to secure loan terms that investors can’t on their own.