KNOW THE RISKS
Most of us are well aware that investing, of any kind, carries some degree of risk. When we invest our hard-earned dollars, we do so on the basis that the risks associated with the investment, are identifiable, measurable and manageable. It goes without saying, the risks should be within some degree of certainty before any investment in made (i.e. using historical data as an indicator, not a predictor, of future value). Investment risk comes from all angles, many of which we experience on a daily basis. Some of the most common are:
Investment risk cannot be eliminated, it can be managed (hedged), but never completely eliminated. Even the most formidable risk management strategies will not shield an investment from ever losing value. Most recently, many of us in the real estate crowdfunding sector received a sobering reminder of this fact from Hurricanes Harvey and Irma – geological risk.
Before committing any capital, we spent countless hours researching the viability of host platforms such as RealtyShares and PeerStreet, assessed each investment’s loan-to-value (LTV) ratio, purpose of the loan and the borrower’s creditworthiness. Understanding local markets is one of the more difficult risks to pin down, simply because the investments are in a different state than you. As it turns out, being spread across multiple regions is great from a diversification perspective; however, quite difficult when trying to determine the quality of specific neighborhoods, gentrification efforts, municipal legislation changes etc.
And after all that research, number crunching, and stress about getting your money back, a darn Hurricane surges in sweeping your investment three towns over. Other than requiring an insurance policy, how do you account for a natural disaster?
When it comes to my own crowdfunding portfolio, 16% of the real estate investments were located in Florida. Of that, 3% was directly exposed to Hurricane Irma’s destructive path. While the necessary work is underway to assess the true damage and implications, I continue to stay the course and recycle principle and yield back into new investments.
Well, for starters, I am more concern about donating to relief funds that will assist my family, friends and others affected. Secondly, there is a 1% cut of the yield the host platform retains on most investments to fund overhead. This covers very smart people on the payroll who are way more experienced to handle this, than I.
In the end, diversity saved my portfolio. The returns, after 1-year, are enough to absorb a complete loss on the 3% exposure, should it come to that. My portfolio spans across 10 States and right behind any great investment loss, is nice looking tax break. Keep on truckin’.
@ Real estate crowdfunders – Anyone’s investment(s) take a hit from Harvey or Irma? If so, how is the process coming along?
@ All investors – how do you manage or think about risk in each of your investments?