Management and evaluation of risk is a major part of any successful real estate investment strategy. Risk occurs in many different ways at every stage of the investment process. Below is a tabulation of some common risks and typical risk mitigation strategies used by real estate investors.


Fraudulent sale
Verify ownership, purchase title insurance

Adverse possession
Obtain a boundary survey from a licensed surveyor

Environmental contamination
Obtain environmental survey, test for contaminants (lead paint, asbestos, soil contaminants, etc.)

Building component or system failure
Complete full inspection prior to purchase, perform regular maintenance

Overpayment at purchase
Obtain third-party appraisals and perform discounted cash flow analysis as part of the investment pro forma, do not rely on capital appreciation as the primary source of gain for the investment

Cash shortfall
Maintain sufficient liquid or cash reserves to cover costs and debt service for a period of time,

Economic downturn
Purchase properties with distinctive features in desirable locations to stand out from competition, control cost structure, have tenants sign long term leases

Tenant destruction of property
Screen potential tenants carefully, hire experienced property managers

Underestimation of risk
Carefully analyze financial performance using conservative assumptions, ensure that the property can generate enough cash flow to support itself

Market Decline
Purchase properties based on a conservative approach that the market might decline and rental income may also decrease

Fire, flood, personal injury
Insurance policy on the property

Tax Planning
Plan purchases and sales around an exit strategy to save taxes.