Is risk aversion holding you back from living your dreams? Read this.
Risk aversion is one of the main habits that hold people back. I guess it’s a sense of security (people really hate to feel overwhelmed). In fact, “risk-averters” suffer more losses than risk-takers.
And I’m not just talking about missed opportunity (because that would be harder to quantify but you can be sure it’s significant). No no, I’m talking about regular daily things.
Let’s look at, for example, something we’re all familiar with… Insurance.
What a racket.
I’m convinced mobsters originated the business model for insurance. You know, like ‘back in the day’ (or in some movie about back in the day), you open a business and the neighbourhood mobster walks in to tell you that you’ll need to pay a monthly fee for your ‘protection’? And you say, “I don’t need protection’ and then your mobster gansta guest pulls out a photo of your business and lights it on fire with his very slick-looking zippo? And then you get it. And you give him the money. Every month.
Sounds like a familiar financial scenario right?
Risk averters go even further than legal requirements to insure anything they can, which leads to more losses. Or in a more Eastern-approach, “you encounter your destiny on the path you take to avoid it” (Oh yeah, my kids love Kung Fu Panda but I think that originates with some way older confusing dude).
So the message becomes: take risks to succeed. Not exactly.
Risk taking has contributed to a few downfalls (like, does anyone ever wonder how a major Canadian corporation like Eatons managed to go out of business?). It’s not just that you would take risks, but that you would smartly choose ‘risks’. And at that point, you might be wondering: would that even be a risk? The term you are searching for is ‘calculated risk-taking’.
What is a Calculated Risk?
A calculated risk may sound like an oxymoron, but it does make sense and it is essential to get you past your fears when you are starting out – especially as a U.S. real estate investor. If you are a risk averter, you may be predisposed to placing too much weight on a worst possible scenario. This is where a formula can make or break your bottom line.
What are the factors that you might be looking at?
I don’t want to oversimplify this for you, because any scenario is going to be different. But to get you started on this type of thinking we’ll pick a common starting point for U.S. real estate investments today.
Let’s say you are looking at buying a property that is in need of repairs (i.e. a foreclosure). Your property evaluation formula will take into account a reasonable degree of risk for you. One aspect to keep in mind in your real estate strategy is: the more units you have, the less risk you have, because you have more tenants paying monthly rental amounts. So instead, you just calculate a vacancy rate right into your property evaluation before you even close the deal.
Risk Master Professionals
As you’ve probably already guessed, real estate investors are risk masters.
We calculate EVERYTHING.
Want to know how most real estate investors get started? Try this simple exercise.
#1: Calculate what it costs you to live per year.
#2: Next, calculate how much savings you might need to support yourself (don’t forget a minimum inflation rate).
Oh OK, take a second… you just got smacked by the cold, hard hand we call reality.
#3: Now, look for investment options and calculate your estimated return rates.
#4: Then, come back to real estate and see what all the fuss is about.
Don’t take too long wasting time in analysis paralysis though. If you like the idea of calculated risks, real estate investing is a surefire win-win for you.