Why You Should Consider Adjusting Your Risk Tolerance

Here are two common perceptions that are technically NOT true:

Water Conducts Electricity.

​Technically, pure water does not conduct electricity. usgs.gov. Pure water is an insulator. The problem is, you won’t find pure water in nature. It’s the minerals and salts found in water that conduct electricity. So, even though water technically does not conduct electricity, you still want to avoid swimming in a lightning storm and blow-drying your hair in the tub. And the next time you get shocked near a pool of water, blame it on the minerals in the water and not the water itself.

Blood Is Blue In Your Body.

​We all grew up believing that blood is blue inside the body until it’s exposed to air or is replenished by oxygen. That’s why we’re told that our veins are greenish-blue. The fact is, blood is red whether in the body or outside.

​​The hue may change depending on oxygen level, but the color doesn’t. Veins look blue because light penetrates the skin to illuminate them – blue and red light (being of different wavelengths) penetrate with different degrees of success. What makes it back to your eye is the blue light. livescience.com

Here is another common perception that is technically not true:  ​​You can not achieve high returns without high risk.

​​This is technically not true because, although it is mostly true on Wall Street, in the world of commercial real estate (CRE investing), the risk-return matrix does not necessarily apply. With CRE, high returns can be achieved at lower levels of risk.  

With stocks, the risk-return matrix is generally true. Investors diversify to reduce risk, but this also reduces gains. Your best shot on Wall Street to make big bucks (as well as lose it) is to bet it all on one high-risk stock like a newly public company or one with a history of high volatility.

​​Increasing returns while reducing risk is a pipe dream. Putting your money in multiple stocks across multiple industries to reduce risk will reduce your returns as losers offset winners.

In CRE investing, high returns are not exclusively achieved through high-risk projects. Increasing returns while reducing risk is NOT a pipe dream. How?

​​Unlike with individual stocks, where the investor can do nothing to influence the risk of a particular stock, the investor can take proactive steps to mitigate risk in real estate.  

Here are some ways in which investors can mitigate risk with CRE investing:

  • Revenue Risks. Multiple factors affect the bottom line, so mitigating the risks associated with these factors is key to maintaining revenues and meeting future projections. These factors include but are not limited to vacancies, delinquencies, expenses, and management efficiencies. Reducing vacancies, delinquencies, and expenses while improving management efficiencies-all work towards reducing revenue risk.
  • Vacancy and Delinquency Risks. Investors can take various steps to minimize vacancy and delinquency rates, including improving the tenant profile, screening, and record keeping. Also important for vacancy rates is tenant acquisition and retention, which can be improved by adding amenities, making updates, and improving curbside appeal.
  • Operational Risks. Operational risks can drag revenues when efficiencies are compromised. Experienced, knowledgeable, and skillful management is the most important hedge against operational risks. Management that can run at optimal efficiency is a boon to the bottom line as revenues are improved, and expenses are reduced.

If your current risk tolerance keeps you from considering alternative investments because you’ve been told they’re high risk, then maybe it’s time you adjust your perception of risk tolerance.

​​Unlike Wall Street, where an increase in returns is often accompanied by an increase in risk, in the world of CRE investing, through risk-mitigating measures, it is highly possible to increase returns while reducing risk.


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Logan Freeman

Building generational wealth with alternative investments