May, 1966, Inverness CC, Toledo Ohio, I stood on the first tee and knew I would have to play the round of my life. I was there to qualify for the US Open. I had one shot and was trying to decide whether to go for broke or play fairways and greens. That was my first real experience with risk management and I failed. I shot an 82 and finished last in the qualifying field. I was heartbroken; but that experience shaped my future. I learned there is no real opportunity without risk.
Serious entrepreneurs know that, but too many “wannabes” still fall for that elusive dream of a get-rich-quick scheme with no risk. As an active investor, I still hear entrepreneurs asserting large opportunities with minimal risk or no competition. My conclusion, either way, is that there is no market, or they haven’t looked.
I am convinced I have an advantage every time I undertake a project. In fact, smart business owners embrace two essential risks to every opportunity – decision and change. First, they decide on a direction to jump, and then they make adjustments and innovations to keep going and growing. Unfortunately, many Entrepreneurs become successful and forget what got them to where they became successful.
In early 2018, I proposed to four of my qualified team that we form partnerships and do affordable homeownership. I spoke to the local city officials and they were all excited and would work with us to provide down payment assistance and funding grants for any infrastructure requirements. I shared what I was planning with the gentlemen who recruited me and he advised me not to do it.
Fear of loss is real. If you have built something of which you are proud, and someone threatens what you have built, in your perception, you will defend your accomplishment. Simply stated, the way you balance risk and opportunity is to look at both as two sides of the same coin. Obviously you are looking for the opportunity side to be bigger than the risk side.
Great entrepreneurs have learned how to realistically assess and manage both sides of the coin in the following business opportunity and risk categories. What impresses me about any successful business is that an Entrepreneur has taken an idea and a product and built a successful long term business as a private company.
If you can create a successful company with nothing but sweat and ingenuity, then I am a disciple. Strategically, visionary entrepreneurs tend to identify and map strategic new opportunities, rather than grow existing current ones. They choose based on market insights or emerging technology. They replace the desires of financial reward with what it takes to start and grow their business, move their business in a new direction or just make a difference in their current job; this scenario plays out every single day.
The risks in new opportunities are usually not evident, so the challenge here is to reduce the probability that the assumed risks actually materialize and to improve the company’s ability to manage or contain the risk events, should they occur. Financial challenges await every Entrepreneur.
Risks and opportunities in this area can arise from many aspects of your startup, before and after product development. First you need to assess the risks and value of investor funding and carrying debt. Then you walk the delicate balance between burn rates, revenue flows versus expenses, investment in marketing, and employees.
Money is necessary for every single new business idea. Some businesses take years until they make profit. This does not mean that the business that does not initially generate profit is not going to succeed. Entrepreneurs have to start with seed capital. Money is necessary to rent premises, hire staff, lease equipment or more.
The entrepreneur that is middle-aged or even older tends to have some money available. Younger entrepreneurs do not have the funds that they need. In many cases they are even still paying off student loans. If you are young, most of your friends have just started out. There is no web of connections that you can use. Networking opportunities are simply not available. As you look for the funding options and you do not have connections, problems appear. Simply put, you will spend more time for the business to become successful.
You need to be respected as a businessman. This only happens in time and when you are actively networking. Those that are older have a better credit history. This is because they spent more time building a high and solid credit rating. Youthful mistakes were solved. With the younger entrepreneurs every single bad financial decision made is still featured on the credit reports.
Due to this, loan companies and credit card companies will often turn younger entrepreneurs down and will not offer financing. Even if a loan is offered, interest rates tend to be high. Older people are seen as being more responsible and wiser. Younger entrepreneurs tend to be discriminated against simply because of age. Unfortunately, there is not much that can be done about this.
The only real solution is to be sure that you do your job right. Your business plan will always be the best weapon you have as you try to secure financing. Owing money is not a pleasant feeling. However, as you age you quickly figure out that a part of your debt was positive.
Short-term business loans are always taken out after you carefully plan repayment schedules. They can be highly advantageous for the business. However, if you are afraid of being in debt, it is possible that you make bad decisions as you look for financing options. Entrepreneurs need to see loans and debt as a tool that is used in order to get the money needed for the business. Finances are always necessary so you do not have to be afraid. Once a business is operational, the opportunity can be maximized, and risk managed through best-of-breed processes, and a rules-based control model.
Knowledge is the new currency. Without knowledge, you are going to make a ton of mistakes and fail. If you are already a good investor, gaining knowledge will make you a great investor. If you don’t educate yourself, you are going to be doomed to blindly follow other people’s advice. Knowledge is potential power. We must take action to make it EPIC.
You’ve probably heard this advice time and time again. But statistically, you are more likely to achieve financial independence if you write down specific goals, read them often, and try to follow them as best as you can. I prefer to quantifiably set goals and dates so each can be achieved by a specific time. My main real estate goal, for example, is to control $1,000,000 in additional real estate this year.
That’s a specific and measurable goal. Therefore, it is easy to determine whether or not I reach it. It is very dangerous to speculate and chase after appreciation, which is also described in the first Immutable Law of Real Estate Investing: “Never Speculate”. It may be the fastest way to build wealth on paper, but you need to have a longer-term perspective rather than settling for the short-term, riskier forms of growth.
To be clear, it is okay to have a strategy to force appreciation via value-add methods like performing renovations, lowering expenses, etc. However, it is not okay to buy a property, sit back, and cross your fingers as you hope it increases in value. That’s just silly. It’s like putting a seed in the dirt and not watering it, just hoping it will grow. It won’t.
As with plants, growing your real estate portfolio into a cash flow producing exercise takes a bit of nurturing. You’re going to be involved. Passive does not mean completely disengaged. You don’t get to be a chairside investor. Learn this. Cash flow is king, and it is the glue that keeps the investment together.
Cash flow covers all operating expenses and debt, which in the simplest of terms means that your tenants are buying properties for you over time. Having a positive cash flow allows you to acquire more properties faster, get greater returns from your investments, and ultimately build your net worth over time. Talk about a no-brainer!
But maybe you’re asking, “But wait… if I buy a distressed property that won’t cash flow immediately but presents a good opportunity, that’s okay, right?” It definitely is. But you need a solid, conservative plan to stabilize the property and make it cash flow positive.
I’ve spoken to many investors who buy a property at a breakeven point and are okay with that. Rather, they are okay with it until the rental market softens. Then, when they have to start paying the mortgage out of pocket, things get dicey quickly. Don’t put yourself in that situation. Have a plan. Stick to it. Do not go after a market because it’s sexy. Don’t be married to a specific market either.
Many investors I’ve met think they have to invest in their own backyards or to invest in properties that are within a one or two hour’s drive from their home. I believe that’s a mistake and doesn’t make much sense. In reality, you want to put your money where it is going to work the hardest for you, which may mean markets that aren’t close to home.
The United States is a very large country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to a variety of local factors. As such, you should recognize that there are times when it makes sense to invest in a particular market and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or because you bought property there before.
Always start by selecting the best markets that align with your investment goals. Many investors make the mistake of falling in love with a property because it is pretty, has nice curb appeal, and/or has been nicely renovated. The numbers look attractive on paper, but that doesn’t mean it’s a good investment. These investors don’t stop to consider what is going on in the market, which is a common trap that many international investors fall into. They are sold properties in depressed markets because they don’t know any better. It would be far better for them to do research on the different markets before making their investment decisions.
Using a top-down approach means looking at the state, the city, the neighborhood, the local economy, and then the job market, demographics of the population, the growth rate in the area, and the unemployment rate. These are all factors of any good real estate investment decision. Once you have a decent portfolio, diversify across multiple markets.
You should have three to five income-producing properties per market. However, this is subjective to the investor – it can be 10, 5, 3… whatever you want – but three to five properties create a great starting point. After you have three to five properties in a particular market, move to another geographically different market with its own local economy. Ideally, select a market that is in a different state. Build your portfolio to three to five properties in that location and then move to the next market. This is easy to do when you have the right team or are working with a reputable turnkey property provider.
Diversifying within the real estate asset class will help reduce your overall risk. Real estate is one of the few investment vehicles that allows you to control your downside and risk, so be sure to take full advantage of all that real estate investing has to offer by diversifying your portfolio across different markets. Performance, in any model, requires the proper allocation of assets.
Doing tasks which are not part of your personal capability portfolio is a mistake. For example: Unless you are a property manager yourself, you shouldn’t manage any of your own properties. If you do, you’ll likely find that it is a thankless job and requires a great deal of expertise and even more of your time. At the end of the day, your time is one of your most valuable assets. You should be spending it with your family, on your career, and looking for more properties rather than managing properties.
If you’re new to real estate investing, go ahead and manage the first couple of properties. You’ll see what I mean fairly quickly. Many people don’t think about maintaining control, but I recommend that you be a direct investor. Control your real estate, own it, and be the boss that calls the shots. You really cannot do that with any other asset class. So why not take full advantage of that if you have the time, desire, and expertise to do so?
If you have the time, desire, and expertise to be active, then you can certainly make more money by maintaining direct control of your properties. The beautiful thing about real estate investing is that you can use or borrow other people’s money to purchase and control income producing properties. Sounding like a broken record, you cannot really do that with any other asset class.
Banks are willing to lend up to 80% of the purchase price, which only magnifies your overall rate of return, which in turn accelerates your wealth creation growth. The way you scale your business is a huge balancing act between risk and opportunity. You can grow organically, or stretch out with big capital investments for volume and reach. Grow too fast, and risk quality and delivery ability, or go slowly only to be overtaken by your competitors or a new technology.
Find the balance. For entrepreneurs the first step is adopting a winner’s mindset, and not become a prisoner of hope. When entrepreneurs become prisoners of hope, they look for others to solve their problem. After that, the key is to embrace risk, rather than fight it, which gives you the real advantage: Embrace the risk of failure. Every entrepreneur must realize that failure is not defeat, but a signal that it is necessary to invoke the two essential risks: decide that change is necessary, and change.
Every investor believes that entrepreneurs learn more from failures than from successes. Short-term failures lead to long-term successes. Embrace the risk of proactive marketing. Marketing is fraught with risk, but playing it safe or no marketing is the ultimate risk.
Proactive marketing is a marketing strategy that focuses on one objective – to generate customers now. Look at marketing as an investment, not an expense. Risk being known for who you are, as well as what you sell. Embrace the risk of standing in your own line. All entrepreneurs should face the risk of being one of their own customers, by using their own products and standing in their own customer service lines.
Only shortsighted leaders assume that customers have unreasonable expectations, or their demands will increase once you have a relationship. Embracing risk and learning from your mistakes really is an entrepreneur’s edge, since only startups and small businesses can afford to fail quickly, maybe multiple times, and all the while having the ability to pivot quickly to achieve success. In fact, these are the keys to balancing risks against the opportunities. When was the last time you felt your business was in balance?