What exactly is risk?
Updated: May 27, 2019
More than once, people have told me that investing in real estate is risky. I think that these people may have made this idle comment without a whole lot of thinking. By contrast I've spent a lot of time considering risk so I'd like to share my thoughts.
"Risk comes from not knowing what you're doing." - Warren Buffett
I've recently gotten my first apartment complex under contract. Assuming all goes well I'll own it in a couple of months or so. But since it's my first, do I truly know what I'm doing? While I wouldn't say that I'm at zero, I will say that as a passive investor I wouldn't invest with a first-timer. That is, unless that first timer has an outstanding general partnership team. To that point, as general partners we collectively have tremendous experience in having acquired over $500 million in apartments. So I've eliminated the risk of inexperience by partnering with people who are not only very successful in this business, but that also have downside exposure as well as their own capital invested into the deal.
The tremendous credibility that comes with my two partners represents a holistic mitigation of risk. The bottom line is that they didn't get to where they are by executing low-quality deals, or losing money. So the fact that they want a piece of a deal says a lot about it - its potential returns; market, submarket and street location; purchase price; physical condition; quality of the property management company; their belief that the property has room for improved revenue and reduced expenses; the quality of the tenants.
So as you can see, yes there are a host of potential risks to consider before undertaking an apartment deal.
But my philosophy on risk goes beyond the granular details of a real estate acquisition. They go beyond undertaking any seemingly risky proposition such as starting one's own business. I think about the risk of not taking action.
If I don't pursue this venture:
I risk laying on my deathbed wondering what could've been.
I risk never achieving a true sense of fulfillment.
I risk 100% of my income coming from one company selling one type of product.
I risk going into retirement depending on Social Security which is expected to go into the red in just 16 years.
I risk most of my net worth being tied to stocks in companies I know nothing about.
I prefer to avoid those risks and instead take calculated risks going into real estate entrepreneurship guided by experienced professionals and build a legacy I can be proud of. The riskiest place to be is well within one's comfort zone.
Chihiro Kurokawa is founder of BlackRiver Equity Partners, a real estate private equity firm providing private offerings to investors seeking tax-advantaged cash flowing investments in real estate.