Assessing Risk vs. Reward in The Investment Decision 💡

Assessing Risk vs. Reward in The Investment Decision 💡

Risk ⚠️

Every decision we make involves risk. Often we subconsciously base our decisions upon the associated risks. For example, you would likely not choose to run the red light because of the risk of getting in a car accident (or at least a ticket).

Reward 🎁

Using the red light example, just as you likely would not run a red light because of the risk, you know that even if that risk never materializes, you only shorten your commute by a few minutes tops. This is an example of considering the associated reward for that risk.

The Investment Decision

In the investing world, the wise decision maker considers the potential for rewards against the known and unknown risk factors. As a general rule, the greater the risk, the greater the rewards. Does that mean you bet your child’s college savings at a horse race? Probably not…the risk is much too great.

As investors, you have the fun job of searching out investments that reward handsomely with limited or mitigated risk. Here is a personal example…

My First Rental Property 🏠

When I bought my first rental property, it was slightly unnerving. I was investing more money than I ever did on something I have never done. As far as I knew, these were the risks:

  • The rehab goes over budget
  • I cannot rent the house in the planned time frame
  • I cannot achieve target rents
  • I cannot sell the house for at least my cost basis
  • Tenants do not pay their rent on time (or at all)

Based on these identifiable risks, I made a plan to mitigate them for the potential upside (rewards). Before I discuss the mitigation plan, here are what I considered to be the rewards for the risk:

  • Property achieves rents at or above target, earning me sizeable monthly cash flow
  • Property appreciation allows for strong equity growth and a very big pay day in a few years

Based on what I knew about real estate, the chances of these rewards happening were strong. Properties tend to appreciate over time and so do rents. So even if year one wasn’t awesome, at some point the rewards are achieved, assuming I manage the properties well.

Recognizing that the potential for rewards was great, my fear went away as I devised a plan to limit the risk. By both screening good quality tenants who are likely to pay rent on time as well as buying at a price that made a conservative estimate for rental income profitable, my risk was largely altogether mitigated. To date, the residents have never missed a rental payment and this year I plan to sell that house for double what I paid 3 years ago. God is great! 🙏🏾

Pay Attention 👀

Inside and outside of the real estate market exist great investment opportunities. Use the above case study as a guide to finding investments that have the optimal strike between risk and reward, based on your risk profile. Even better, if you can mitigate those known and unknown risks with a solid plan, you’ve eliminated a great deal of downside and injected peace into your portfolio.

Passive Investors

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Safe Investing!

RRII

God Bless Ukraine 🇺🇦


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Rodney Robinson II
Rodney@RodneyRobinsonII.com


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