Real estate bought and managed properly is one of lowest-risk asset classes available.  The problem is: most people do not know how to buy real estate properly and end up losing money.

Two Rules

There are two simple guidelines that constitute a good real estate purchase:

1) You must be “all in” including purchase, rehab, and closing costs for less than it will be worth after the rehab.

2) It has to cash flow after all monthly expenses including maintenance and occupancy.

In short, it has to have equity and cash flow.

Each real estate investor has his or her own preference on what kinds of margins they are comfortable with.  I am comfortable with equity above $15,000 and cash flow above $150 a month.  Those margins add protection against market volatility.

Sub Market

Another thing to consider when reducing risk in real estate is the sub-market.  A strong real estate market is located in a city with low unemployment and a growing population.  For me, investing in Texas real estate and the surrounding areas in the midwest is what I’m doing.

I would’t recommend investing in Detroit real estate even if it did have  a ton of equity and cash flow for this reason.  I would also stay away from some of the more volatile markets such as California and South Florida.

Investing in states where the highs don’t get too high and the lows don’t get too low is a good recipe for reducing risk.

Conclusion

In conclusion, investing in real estate is not risky if you buy with equity and cash flow in a stable market.  Most of the real estate investing horror stories come from volatile markets where people were investing based on speculation without equity or cash flow.