How to Manage Risk in Real Estate and Business Investments

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In real estate and business investing, we are surrounded by liability. Protect your assets and yourself by applying tools to help control risks.

Video Transcript

Hi, Jay Massey with the CashFlowDiary.com, with another quick tip about real estate and business.

Today we’re going to talk about risk management.

Welcome back. Risk management, what is it? What are your risks? How can you figure them out? More importantly how do you manage them? One of the unique things about real estate and businesses, that it’s fraught with all kinds of risks.

One of the great things about real estate and business is that it’s fraught with all kinds of risks which is what actually creates your opportunity.

So your key skill set is to understand that you’re managing all kinds of sets of risks in many different ways. So for example if you were a stock market investor and you go what is called long, one of the ways to manage your risk is because if you buy a stock and you hold it, one of the things you wanted to do is to go up.

Well one of the ways that you could manage your risk is use a tool called an option or in this case, specifically a put option, right? That would be a tool that you use to manage your risk. So it’s not that you can ever have a deal that is risk free, it’s what the tool is. So that’s a tool when you’re using a paper asset.

So what about a piece of real estate? Well, clearly one of those tools is property insurance right? So you got property insurance. Now property insurance comes in many, many different forms. When it comes to the actual building itself, it’s typically called fire insurance in a lot of cases and sometimes it could even be called fire and casualty insurance and sometimes if you’re actually rehabbing a building, it should be called Builders Risk insurance. Because there’s a special type of risk that’s happening when you’re actually doing certain levels of rehab to your property.

So you’ve got options, you’ve got property insurance. Another way of thinking about risk management is one of the things that we all risk, especially when you’re in business is you are — well you’re a target and sometimes that risk means that you have the ability to cost liability and what you’re looking for is some sort of protection from that, which is what you gain when you use some sort of a corporation or legal entity. Sometimes that corporation could be a C Corp and S Corp or an LLC. Those are just some of the many letters that are available inside the US system.

You definitely want to talk to any of your competent legal attorneys etc. to be able to understand what those options are. But managing risk is pretty much what we do every day any way. Think about it this way. If you drive a car, if you eat, if you walk or if you even talk to another person and have a relationship, you’re always in a process of 5risk management.

When you’re eating, you’re trying to eat and chew your foods small enough so that you don’t choke. When you’re talking to someone and you’re within a relationship, you’re hoping that you don’t get hurt, so sometimes we manage our risk. When you’re driving a car, do you put on your seat belt? Do you use the brake? Do you use the accelerator when you need to? What about your turn signal? These are all tools to manage risk.

When you begin to think about risk in different terms, it doesn’t sound so scary and it becomes something that you can actually learn that you already know how to do, you just need to be educated on what your tools are to manage your risk.

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