Morais Dicks: Even Hollywood Drives Risk

After one of the most significant economic downturns in 2008, which resulted in a disproportionate bubble of the housing market, every investor has learned to be more careful as they manipulate capital to earn money. Nowadays, those who used to enjoy risk in their portfolio are more conservative than ever, and a lot of the ones that used to be cautious in their investing have decided to quit this risky business altogether. The real estate market is healthier now, allowing it to appear more desirable even to those with little to no experience.

Morais Dicks, a successful investor who has made real estate his primary source of income, explains that there are a few factors that have a directly proportionate relationship in the industry. The most important one usually deals with the risk-to-return ratio and is closely followed by the risk-to-timing correlation. The risk-to-return ratio is a connection that showcases how people who are willing to take bigger risks are almost always going to expect higher returns. After all, one would seldom, if ever, consider putting an excessive amount of a particular investment in their portfolio if it did not have a potential for a notable return. The second relationship, as per Morais Dicks, explains that the amount of time that one is willing to hold on to the investment matters. For example, if a person wants to have a rapid turnaround and sell their investments only a few weeks after purchase, they will generally earn less money. Those who prefer to hold, however, are usually subject to higher returns as the true growth happens over several years, not overnight.

Just like with any other type of investment, one must be aware of their ultimate goal with the real estate that they purchase. Knowing this will help forecast future trends related to the risks involved. Some intend to have a monthly cash flow through rental income, some want to restore properties and sell for a one-time gain, and there are those hoping to earn money but would not mind also habituating in the property themselves. Depending on the category in which one falls, their strategies and risk will be assessed at various levels. For example, the person who is hoping to live in the residence is probably not too worried about the risk since they are only flirting with the idea of selling for a capital gain. The party looking to restore and sell rapidly, however, is going to be subjected to the cruel conditions of the economy. Thus, they will have to be a little more sensitive to risk to avoid losing money.

There is a location-based risk factor that will generally be a consistent for everyone in real estate. For instance, those flipping properties in Hollywood will have to spend a more considerable sum of money to purchase them as this area has enormous price tags. Given that they will have to use more capital, they are opening themselves to the potential of higher losses. Anyone who is located in a very popular and booming area should be ready to face higher risk since they will usually have to play with more money than those living in less-known suburban areas around the nation.

The last group, as explained by Morais Dicks, is where most of the consideration for real estate investors' risk planning comes from. This is where factors like age, marital status, and children enter the equation. Consider the following example to better demonstrate the concept -- a 51-year old investor with an unemployed wife and two children currently in college. By default, this person is going to be very sensitive to risk for a couple of reasons. First, they are a little older than the average investor which puts their retirement in jeopardy if something should go wrong. Since the wife is unemployed, it would be fair to assume that the husband covers the costs of living for the couple and college expenses for their children. Individuals outlined in the example are substantially more sensitive to risk than a 20-year-old, single individual who just wants to try the market.