How to Minimize Risk in Real Estate Investing

The Risk with “Entry-Level” Real Estate Strategies 

Yes, there’s risk in real estate. There’s risk in anything that provides a return on investment. This is true for stocks, real estate, and any other asset. One problem I see with people trying to minimize risk in real estate is starting with “entry-level” assets.

The #1 asset that fits this category is single-family houses because they’re familiar. There are tons of books written on them, they’re on TV shows, you might even know someone who flips or rents out houses. 

But the issue with this is that 1) they don’t lead to financial freedom and 2) it’s more of a waste of time than it is money – it’s not scalable and it's not passive.

Think about it. If you're making $200 per month from one rental property (and that's if you're lucky), you'd need 50 properties to replace a $10,000 monthly income. That's a lot of properties to manage. Plus, you have what I call “single tenant risk.” If that one tenant moves out, you're covering 100% of the expenses until you find someone new.

Understanding Risk in Different Real Estate Strategies

Let me break down the risks in popular real estate strategies:

Fix and Flip

I like flips because they generate chunks of cash quickly. Since I'm only holding a property for six months, my exposure to market crashes is limited. Even if the market goes down, it usually doesn't crash in just six months.

But flips have their own risks. I can overestimate the after-repair value. My contractor can go over budget or take longer than expected. If I'm using hard money loans, delays mean I'm paying extra points and penalties.

Buy and Hold Rentals

With rental properties, I don't have the contractor and timeline risks that I’d have in a flip. But I do have single-tenant risk. That means that if my tenant decides to move out or they miss rent, then 100% of my cash flow for that month is gone until I can replace the tenant or they start paying again.

Plus, I'm much more exposed to market downturns. I knew people personally who lost entire portfolios they spent years building during the 2008 recession.

Short-Term Rentals

I used to really like short-term rentals. They solved the single-tenant problem because you have multiple guests and bookings scheduled out in advance. But three years ago, things changed. A good friend of mine watched his substantial short-term rental portfolio go from profitable to losing money as the market got saturated.

There's also legislative risk. Look what happened with Airbnb in New York City. Thousands of investors thought they could rent their properties as short-term rentals, but then the city changed the rules overnight.

Co-Living and Pad Splits

These are newer strategies that can work, but they come with legislative risk, too. The idea behind this strategy is to buy a single-family house and convert 3–5 rooms into bedrooms. Then you rent out each door. This eliminates the single-tenant risk, but similar to short-term rentals, there is a sizable legislative risk. 

Many cities haven't passed laws about co-living yet. You could invest in a strategy that gets banned a year later.

Why I Prefer Commercial Real Estate

This brings me to commercial real estate, specifically multifamily properties. Here's why I think they're the lowest-risk real estate investment:

Proven Track Record

Multifamily properties have proven themselves over the decades. In 2008, when the real estate market got hammered and people lost their portfolios, multifamily properties held up better than almost everything else. Rents stayed relatively flat, vacancies increased slightly, but people still needed places to live.

During COVID, people paid their rent. In inflationary periods, rents can increase significantly. I've seen rents go up 25% in strong markets.

No Single Tenant Risk

With a 50-unit apartment building, if one tenant moves out, you're only losing 2% of your income, not 100%. This makes your cash flow much more predictable and stable.

Better Market Resistance

Multifamily properties are less subject to market swings than single-family homes. People always need affordable housing, regardless of economic conditions.

Long-Term Demand

Here's something most people don't realize: it's too expensive to build new affordable housing right now. Construction costs are high, interest rates are high, and permits are down over 50% in the last 18 months. This means less competition and upward pressure on rents.

The Current Opportunity

I think we're in a unique time right now for multifamily investing. Two and a half years ago, the risk was higher because lenders gave too much leverage and many deals used floating-rate debt. When interest rates went up, some operators got into trouble.

Today, it's different. We're getting lower leverage (around 75% of purchase price), fixed-rate debt, and prices have dropped 30-40% from their peaks. The market is more balanced, actually favoring buyers.

This creates a rare opportunity: relatively low risk, lower prices, and strong long-term outlook.

How to Get Started Safely

If you want to minimize risk in real estate investing, here's what I recommend:

1. Skip the stepping stones. You don't need to start with single-family properties to get into multifamily. The skills don't transfer as much as you'd think.
2. Build a team. Surround yourself with experienced professionals who can help you make better decisions.
3. Learn about syndications. This is how most people get into larger commercial deals without using all their own money.
4. Focus on cash flow, not speculation. Buy properties that make money from day one, not ones you're hoping will appreciate.
5. Choose markets carefully. Look for areas with job growth, population growth, and landlord-friendly laws.