The Basics of Risk Evaluation

The Basics of Risk Evaluation

To make smart investments, it’s important to know how to recognize what’s a risky investment and what isn’t. Keep reading to learn what to look out for.

Risk in High Land Value

One thing most income property investors don’t come to realize is most risk comes from high land value. Though land is the part of the investment which tends to appreciate the fastest, it’s temporary, even fake, appreciation.

So, knowing the risk that comes from high land value, how can we use this

knowledge to create intelligent investment strategies? We know where the risk area is, so it becomes simpler

to calculate. It’s somewhat of an ambiguous and emotional concept, driven by fear and loss, but by knowing it you can protect yourself from losing money.

Why Stick to Low Land Value?

As an investor following Jason Hartman’s strategies, it’s a good idea to avoid markets with highly valued land. Instead, gravitate toward areas with high improvement value. It’s far less risky. In fact, the risk is almost nonexistent.

For example, say you buy a property for about $159,000. The insurance company calls and tells you they’re only willing to insure $135,000 of it. Why? Because insurance companies will only insure the improvement part of an income property. The land will always be there, but the house won’t; anything could happen to it. This means there’s about $24,000 of land value.

In this scenario, if the value of the land gets cut in half, as an investor you would only lose about $12,000. However, if you instead bought a home with a land value of $1 million, and the value was cut in half, you’d be losing closer to $500,000. A $500,000 loss could really hurt, and that’s the major difference between

high land value and high improvement value. Smaller land value equates to minimal risk.

Population and Demand

Jason Hartman recommends investing in areas with universal demand, and there’s a good reason. As an experiment, try looking at a population clock, readily available online. Write down the population number and then visit again in an hour or the next day. Notice how much the number has changed.

What does this mean? Population is increasing, but housing isn’t. WE can’t create more land. This creates a high universal demand for housing, making income property a smart investment because there will always be a market for it.

To create real wealth from income property, it’s important to invest in low risk, geographically diverse properties. Furthermore, one should only invest in things with high demand. With the right strategies, there’s money to be made in income property. (Top Image: Flickr | Jinx!)

The Young Wealth Team