Top 6 Risk Reduction Strategies for Real Estate Leverage Investing

There is no doubt that properly planned and executed real estate leverage strategies will result in profits for investors. The trick is to be sure that your behaviors are all the right ones, and the research is sound.

These risk reduction strategies will help the real estate investor to minimize the chances of a losing investment.

1
Look for Below-Market Rents when Purchasing

Real Estate Rental Property
Real Estate Rental Property. iStockPhoto

If you can locate a rental property with a significant percentage of rents that are below the going market rates, just getting the rents up to market standards will result in less risk in your investment due to better cash flows.

The ability to do economical remodel or upgrades to increase rents is also a good indicator for purchase of a rental property.  Often landlords will become tired of marketing and they will settle for acceptable rents, even if they are below current market rates.  

Of course, this skews some of the valuation and ROI calculations, but in a good way if you see it.  When there is more rent available, actual rents skew the calculations in the wrong direction.

2
Look for Favorable Financing that Reduces Cash Outflow

Homes and Mortgages
Homes and Mortgages. iStockPhoto

Working an assumption or other creative financing solution that reduces the interest rate is a good strategy if the property isn't over-priced. Lowering your payments by lowering the interest rate will increase cash flow and reduce real estate leverage risk.

If you're relatively certain that you will only hold the property for 10 years or less, look at an Adjustable Rate Mortgage, ARM for that period.  It won't reset until you are in the sale process or ever if you sell sooner.  You will get a lower interest rate and higher cash flow.

3
Just Make a Higher Down Payment

Real estate bonus money.
There is a debate about the ethics of offering bonuses to real estate agents for selling certain listings. (c) Photo: sxu.hc

With all the hype about low-down or no-down financing for huge profits in real estate investing, it's not hard to get on the wrong side of an investment.

Sometimes lowering your return on cash investment is still a better solution. High debt can backfire, particularly in a period of higher vacancy or credit loss.

Raising your down payment will take more cash upfront, but it will reduce the amount financed and lower payments.  When payments go down, cash flow goes up.  Refinancing is always an option later.

4
Look for a Property that You Can Improve Profitably

Duplex Property
CanStockPhoto

Increasing the value of a property via improvements increases equity and results in greater profits upon liquidation of the asset. Should interest rates decrease, the increased value can also be used to finance other investments or decrease debt service.

The right improvement decisions can also attract better tenants and justify higher rents.  The ROI on the money invested in the improvements can be attractive.

5
Look for the Hot Areas of the Future

Fix & Flip Real Estate Investing
Fix & Flip Pros and Challenges.

Locating the area that's about to be "the place" can be quite profitable. Identifying a neighborhood that's on the front end of growth and rehabilitation puts you on the front end of appreciation in value as well.

Recent surveys show more older and younger home buyers and renters alike want to live closer to city centers.  These are often older neighborhoods and improving an older home can be profitable.

6
The Obvious Strategy is to Buy Value

Real Estate Investing
canstockphoto
This one requires little explanation. The research time and effort to locate a property priced below market is usually well worth it. Starting with equity infusion just puts you that far ahead and reduces risk if market rents decrease or other misfortune occurs.

Leverage is Good - Until it's Bad

It was interesting to look back at the crash that began in 2006 to see how investors fared while regular homeowners were being foreclosed and forced into renting. There were many investors who went broke almost overnight. Leverage and short term strategies were the primary problems. Those engaged in flipping and fix & flip were the hardest hit. Many were riding high with too many properties in the pipeline, all with some type of financing to get them to the closing table. When the market crashed, they had no buyers and no way to repay the loans.