Q: I'm asking all of my my guest if they could identify the biggest risk that they face. This could apply to this topic, or as you as an investor or even you as a lender. If you could identify a BIGGEST RISK and then if there is a strategy that you recognize to minimize or manage that.
A: I'm going to probably give you a different type of answer. I think DarrIn, the greatest risk is the risk of not doing anything. I look back on my life and it's when I take the risk to do things that are outside of my comfort zone.
Sometimes it works and sometimes it doesn't. But I'm trying. And, I look at it, like I said before earlier in this podcast, that I have friends that I know that are so fearful of taking risks that they won't do it. Even though, they might be miserable in what their particular situation is at that moment. But to to risk failure is is worse than staying in the status quo. So my personal opinion about risk is is to go forward and and try things even if you feel uncomfortable doing them.
Q: What do you see is your biggest risk that you face?
A: I think the biggest risk I face is kind of ties into what I was saying earlier is that I think the biggest risk is thinking or pretending that you have a crystal ball and knowing or thinking that the market has topped out and then letting that turn into fear of buying anymore, or continuing to grow your business model. Which, for us is acquiring property and growing the portfolio.
I get asked almost weekly now, “Well, don't you think the markets too hot and where the ceiling?” I'm like we could be but you know people were saying that three years ago and here we are and we're higher than we were then.
You can always play that game where well. “You know, things seem too hot. I'm just going to go and wait it out”. Well, you could be waiting it out for the next 10 years. So the question is do you want to wait it out and let 10 years pass you by or do you want to take a calculated risk now?
As long as a deal makes sense and the numbers make sense and you can you can run it like a need to, then everything is fine.
So I think the BIGGEST RISK actually is letting that fear overrun you, or thinking that you know better than the market. Nobody knows where the markets going right nobody knows but I think letting that turns to your and then turning to in action. I think it's the BIGGEST RISK, at least for me.
From an investor and rehab standpoint the two big issues that people get hung up on are under estimating the rehab cost and under estimating the time to complete the project. You'll find that if you go forward that type of lending, they're always going to ask, “What’s your exit strategy? What's your backup exit strategy? What’s your third exit strategy? That's what I try to find. If I can't refinance out, can I quick sale? Can I fire sale it? Can I do some type of creative strategy? What does it look like on a commercial note? What does it look like on a fixed 30-year, you know Fannie and Freddie note? I try to play out that worst case scenario, “can I weather that storm?” Then I back into the deal.
Headaches faced by Centimillionaires, really? If you had $100,000,000 would you really have headaches?
Richard Wilson is the authority on wealth challenges faced by the ultra wealthy. He is the founder of he The Family Office Club, and author of the best seller, The Single Family Office where he helps Family Offices deal with the challenges of preserving and transferring the family wealth to the next generational.
By design, centimillionaires, families with net worth in excess of $100,000,000, keep a low profile. They don’t do interviews, nor share publicly about the the challenges of managing and maintaining their wealth.
Prior to starting The Family Office Club, Richard worked in risk consulting for publicly traded companies and then as a placement agent working with hedge funds calling on investment managers. During his investment placement work, he realized that the investment managers were not a good fit for his opportunity. He also learned about Family Offices.
Family Offices were the qualified prospect that had the ability to invest in his opportunities. He searched for information about Family Offices, but found very little. There were no white papers, no network, nothing.
To satisfy his own curiosity, he followed Gary Vaynerchuk’s advice and documented his journey. He started reading, meeting with family offices, and sharing his findings online. Shortly after starting and documenting his journey, he received invitations to speak at family office events. Suddenly, he had the attention of the audience he sought, family offices.
Looking for expand his reach, he purchased Family Offices.com and focused all his efforts on meeting with family offices to learn more. Since 2007, he has done over 115 events, written a dozen books, posted 1800 videos, all of this on family offices.
His progression from finding a need for information, gathering the information, and sharing the information is a textbook example of how to develop and be recognized as an expert in your field.
Inefficiencies in the Family Office industry are and forever will be. Which provides the opportunity for Richard or anyone seeking a chance to develop a niche in a market space.
While he developed a ton of digital information, it was not until he was invited to speak at events that his family office consulting business took off.
Richard truly started from scratch. As he researched and shared what he learned, the volume of digital content grew. Once he had the digital content, he got the opportunity to speak at events, which put him in front of his ideal client. Being in front of his ideal client gave him access and deal flow with his ideal client, which provided him additional, quality content. This cycle continued to where he it fed itself.
Additionally, he has found that the best way to attract investors is to take the long view and provide the most value. When you you believe in the niche, and want to be involved in 20 years, it shows.
Family offices have specific needs. For those, Richard and Family Offices provide consulting help to get set up, and connecting them with providers to meet their needs.
On the other side of the fence are the service providers and Investors looking to provide services or raise capital from Family Offices. For these, Richard shares what information that helps these business tailor their offer so to better appeal and attract the attention and business of family offices. Richard has also authored the number one book, Capital Raising which teaches investors how to raise capital.
Knowing both sides of the market allows Richard ot better serve these individual markets, and be the connector between the two.
The centimillionaire is one that has $100,000,000 net worth. There are 16 times more centimillionaires than billionaires. Every billionaire was first a centimillionaire. The centimillionaire has just as many headaches as a billionaire, less identifiable and typically more accessible.
In Richards book, Centimillionaire MIgraines, he found six unique pain points. Here he shares a few. To learn more about each pain point and get a free copy of the book, go to and complete the webform at https://centimillionaires.com/book/.
Most Centimillionaires achieved their wealth through the sale of their business for which they had a single focus for as many as 20 or 50 years. Now they have hundreds of millions of dollars and could literally do anything they want. They have request to participate in multiple investments, and joint ventures. What they need is clarity specific to what they want. Without it, they will be instructed by others on what to do.
In order to gain clarity, they need to make decisions, on what they want regarding income, investment returns, transparency, where do they want to live, where they what their kids to go to school, etc.
Mismanaged expectations and communications are a recipe for disaster. A lot of families stop talking when money is involved. Without mutual understanding of what is happening things can go awry. Why is the brother, who has an interest in and operates the family business, using the company jet? If the brother happens to lose the sisters money in the business, what happens?
Centimillionaires may not even know they have a deal flow problem. If they are only seeing three deals a quarter, how would they know this a problem if they are not talking with a similar family office to compare notes?
These ultra wealthy acquired their wealth due to their ability to control their outcome. Now they have a less control, and they don’t know what to do.
To learn more go to https://centimillionaires.com/.
Too many times service providers think they can charge more because you are wealthy. For most wealthy people, part of the reason for their success is due to not over paying for things. While the ultra wealthy can afford to pay more, they are not interested in paying a luxury price for budget level service. They are willing to pay a high price for a high level of service.
They need people who they can trust and who are in it for the long run. Not someone who is short sided. They need ethical people capable of providing valuable service.
Each week I ask my guest what is the Biggest Risk they see that real estate investors face.
BIGGEST RISK: The BIGGEST RISK is Key Man Risk. Most ultra wealthy individuals have developed the specific skill set and knowledge over time. If they drop out of the picture, how long can the business sustain itself?
How to manage the risk: As much as possible, systemize, push the task down to support staff. Realize that the results may be less, but still effective.
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What is the BIGGEST Risk Real Estate Investors face?
Merriam Webster defines risk this way:
possibility of loss or injury
In Real Estate, Risk is everywhere. It’s what you don’t know can hurt you.
That can be a problem when you are talking about millions of dollars.
This is why so many wise, experienced investors place a premium on knowledge and so much effort is spent in due diligence.
Most investors agree that you can never know everything, but you can dig in and ask questions and get answers that make sense for you to go forward.
By day, I am an insurance broker. My focus is working with Real Estate investors to assess their exposure to loss and help them manage the risk.
Risk Management is a continuous process. There are four basic steps to risk management:
In insurance, we utilize three specific Risk Management strategies:
Where is the risk in real estate? This is the question you have to look for when you buy a property. It’s your job to find where the risk is hidden, because the seller will not tell you. The due diligence period is your opportunity to go through the property from top to bottom looking for the hidden risk. You also need to comb through the numbers to find out what is missing, and where you can make things better.
Depending on what unexpected information you find during due diligence, the purchase process provides you an opportunity to present your findings to the seller. The seller can offer to correct the problem, or provide you a discount on the price. If you fail to find these hidden issues, and address with the seller, they are yours. Once you close, the property and the problems you did not find are yours.
What do you know about the Metropolitan Statistical Area you are investing in?
Beyond, the MSA, you want to understand the neighborhood you are investing in. In many markets, a mile can make a big difference. These are all numbers you want to know and understand to see if they will be able to support your investment model.
The physical condition is where you look for deferred maintenance and assess the major building systems, Roof, Electrical, Plumbing and Heating & Cooling. How much life is left in each? What is the cost to replace? These questions need to be answered so you can properly budget for replacement. If you fail to budget for these, the unexpected cost will negatively affect your cash flow and make for some potentially difficult conversations with your investors.
What is the Financials condition, what do the books look like? Are the Seller’s records in order? What is missing? What is out of the ordinary? This is where you dive deep into looking for things that are missing and or out of the norm.
A high water bill is a tip off for leaks, and something you can fix and reduce your cost. How do the rents compare to the market rents? Is there room to increase rents? Is there any record of laundry income? Some small property owners put the cash in their pocket without recording. This can be a hidden source of value not expressed on the sellers financials.
Regardless of what you find from the seller, you must contact each service provider and find out what your actual cost will be. If the seller has owned the property for a long time, or owns multiple properties, their cost will be less than yours. Anything you can do to improve the net operating income should be part of your value add strategy.
Management is one of the greatest ways to lose money in real estate. Is management pushing rents? Are they marketing the property to attract quality tenants and turn vacancies quickly? This is an easy area to improve upon, especially if the property has not been professionally managed.
If you are investing with others, what is the experience of your partners or deal sponsor. Are they experienced in this asset class of real estate investing? What makes you certain you will be able to achieve the returns you are projecting?
Your purchase price needs to accurately reflect the value for the property as is. An experienced investor will not pay more than what the property supports. The seller and the seller’s broker job is to get as much as possible. Your job as a buyer is to stay disciplined and not over pay. You cannot get in a bidding war driven by your emotions.
Too often, sellers agree to a sale price with a higher offer only to learn that the buyer cannot perform. If the seller really wants to sell, and no offers meet their ask, they will be forced to deal with the reality of the market.
Due to the significant price of large commercial real estate deals financing is required unless you have an endless supply of money. Fortunately, commercial real estate financing looks at the performance of the property. The bank will not lend more than the property can support.
The bank will require at least 125% debt cover ratio. If you don’t understand this before you make your offer, you may lose earnest money or the deal. Neither is a good option. If either happens, you will not be recognized as a performer amongst the local commercial real estate professionals.
Insurance is easy for new buildings with desirable tenants. There is an unlimited supply of insurance companies ready to provide coverage for this type of risk. As your building gets older and has more deferred maintenance, you will have challenges finding insurance.
To avoid any problems with insurance, pay attention to the age and type of building system in place for: roof, electrical, plumbing and HVAC. Most insurance companies require updates if these are older than 30 years. During your due diligence, ask and find out age and type of building system in place.
Where are we in the market cycle? Are there reasons to be concerned, or is there momentum and demand for you to take advantage of. Do not assume that the most recent past will continue. Markets ebb and flow, and for every top, there is a bottom. If you are buying at the top and selling at the bottom, you are doing it wrong.
What is your exit strategy? Every property will eventually sell, so what is your exit strategy? Your strategy will be very different if you have partners compared to if you are investing solo. How quickly can you return capital to your investors? What rate of return are you projecting? What happens when you get there and the market does not support selling?
Any experienced investor knows there are additional lessons, the unknown, waiting for you. To prepare for these, you have to do your homework up front and make certain our capital reserves are sufficient to take care of these when they happen.
As an investor, you have to understand these lines, and create your own lines you will not cross. In an effort to learn more about investors, their risk models and the lines they will not cross, I began asking the guest on my weekly podcast CREPN Radio the question,
What is the BIGGEST RISK?
To my delight, the guest have shared what concerns them and what they do to manage their risk. Theri answers have covered the spectrum of real estate investing.
Following is an example of the answers guest on CREPN Radio have provided.
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