When it comes to investing, there are several questions you need to ask yourself. One of the most important is, what is your risk tolerance? So, what is risk tolerance, why is it important, and how do you figure out yours?
What is Risk Tolerance?
Risk tolerance is simply how much risk you are willing to take on in order to achieve a certain level of return. This is a spectrum but at the two ends are those who are comfortable taking on a lot of risk in order to potentially earn a higher reward, and those who want as little risk as possible so they can avoid potential losses.
Why do I need to know mine?
Knowing your risk tolerance helps guide you to the right investment strategy for you. If you are extremely risk averse, flipping or trying to BRRR properties is probably not the best option for you right now. If you are willing to take on more risk and are looking for great returns, a rent ready property most likely isn’t going to get you to your goals fast enough.
Risk-Averse
Just because you aren’t willing to take on as much risk doesn’t mean you can’t still invest in real estate. It just means you need to find a strategy that fits with your goals and comfort levels. You may need to take more time learning about investing to develop your comfort level before moving forward. Starting out with a short-term rental or a turnkey property is usually a comfortable stating point for most people.
Risk-Tolerant
If you’re willing to take on more risk, you have a lot of options. You can still do short-term rentals or turnkeys but may want to look into flipping, BRRRing, buying from a wholesaler, and creative financing strategies. These strategies will help launch your investment portfolio quickly, give you more capital to work with, and give you the biggest bang for your buck.
Those in-between
Most people fall somewhere in the middle of being risk averse and risk seeking. This means that you will have a lot of investing strategies at your disposal. People in between often dabble in a few strategies before settling on one that fits them best. You may be interested in lipstick flips or cosmetic BRRR’s. You won’t have as high of a return but your risk is lower.
So, What’s your risk tolerance?
There are a few different ways to go about this. There are questionnaires you can fill out that will give you a better idea of where you fall on the spectrum. You can simply think about how you’ve handled risk in the past. Have you always been a rule-follower or a rule-breaker. Do you jump into new experiences and settings or take things a bit slower? Most people instinctually know where they land, the most important thing is to just be honest with yourself.
No matter what your risk tolerance is, there is an investment strategy out there for you. The key is to find one that fits your goals and comfort levels so you can stick with it and be successful. If you’re not sure what your risk tolerance is, that’s normal too. The important thing is to start somewhere and then reassess as you go.
What if my Risk Tolerance Changes?
Your risk tolerance can (and probably will) change over time. As you get more experience with investing, you may become more or less risk tolerant. That’s why it’s important to reassess your goals and strategies periodically to make sure they align with how you are feeling about risk at that moment.
There is no right or wrong answer when it comes to risk tolerance. It’s all about what works for you and helps you reach your goals. So, take some time to think about your goals, do your research, and develop a plan.