This article was written by Realized Founder and CEO David Wieland and originally appeared on MarketWatch. You can find the full article here.
In our experience, real estate investment properties aren’t typically managed with the same discipline as traditional asset classes. Generally accepted and standardized measures of traditional asset risks don’t exist in real estate, and there is no framework for evaluating real estate risk. However, there are risk attributes with which you should familiarize yourself.
Understanding risk factors
If you receive an investment opportunity as an independent real estate investor, you may lack access to public data like you have with other asset classes to help you determine risk. That’s why we feel it’s important to work with a knowledgeable adviser and also understand these critical factors for assessing an investment property:
- General market risk
- Real estate market risk
- Geographic risk
- Property-specific risk
- Structural risk
- Liquidity risk
Evaluating real estate risks
If you understand the risks associated with real estate investment, you can gain a clearer picture of how to manage real estate wealth in a similar way to how you manage other investment portfolios.
In some markets, you can compare the credit of two companies in two completely different sectors based on a standardized set of metrics. Similarly, you can evaluate commercial real estate by quantifying the cash-flow risks of two different properties in two different locations.
In that respect, you would measure the projected returns and the likelihood of those returns against the risk you are willing to take.
Just as a wealth manager would purchase different asset classes to create a non-correlated and diversified portfolio by standardizing the way we look at risk, real estate investors can build portfolios of commercial and residential real estate that take into account overall after-tax returns.
By delving deep into risk and considering the correlations between different property types, you can manage real estate investments with the same sophistication as traditional asset classes — helping to bridge the gap between real estate and wealth management.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
There is no guarantee that the investment objectives of any particular program will be achieved. All real estate investments have the potential to lose value during the life of the investment.
The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.