To Know Your Risk is to Love it (Sort of)

If you fly anywhere in an airplane, you probably know your risk of death is far lower than during your drive to the airport. Still, many of us are deathly afraid of airplanes (it’s just unnatural to get to 30,000 feet in the air, isn’t it?), while how many of us are really worried while texting and drinking our to-go coffee that our morning drive will be fatal?

Not to be morbid, but most of us have no real notion of risk. In investing in real estate, however, we should not only consider the risk but embrace it.

By “embrace” it, I don’t think that any of us really want to give risk a big hug. We would rather risk as little as possible.

But as we all know, there are risks not only in everyday life, but in the investments we choose to take on.

So perhaps in the spirit of “knowing yourself,” you should prior to buying anything else realize your own spirit and appetite for risk.

I know a Florida investment counselor who is very conservative in his personal life. Call him Clyde. He is the type who will tell you to always plan for a rainy day, no matter what type of investment you are involved in (real estate is his specialty but he handles other types as well). He tells retirees to use their money carefully so that they don’t have to meet his ultimate fate worse than death (going back to work to earn enough to live…a worse fate than an early morning car crash or a plane wreck, perhaps?).

So he is very conservative when it comes to investments. But he is not so careful about his hobbies and lifestyle. He gets into planes and voluntarily jumps out of them (with a parachute, of course, but what if it does not open? That happens often enough to be a concern).

Clyde knows the risks of his chute not opening (his odds are good that it will be no problem), and he knows the risks of all investments he suggests to his clients.

I don’t know about you but in my own case, I would prefer less risk in both investments and lifestyle (no airplane trips unless I am a passenger and as little risk as possible when buying and selling real estate).

The point here, however, is to know your risks and realize in all honesty that it will play an important role in what types of investments you prefer.

I think it’s likely most of us not like Clyde. We don’t often separate our personal from our professional reality of risk. In other words, if we are cautious, we are cautious in all our dealings. And vice versa.

I do think of obvious examples of risk-takers who do so professionally and in their personal lives. The head of Virgin Air, Richard Branson, comes to mind immediately. Branson takes risks in all his activities ranging from ballooning business. He seems to embrace it.

You might want to go as far as he does in giving it a big bear hug. But knowing your comfort level when it comes to risk-taking is as important as the price, the location, and the transaction terms of that piece of property you are considering.