Understanding Risk

We define risk as the likelihood that your investment will deviate from an expected or desired outcome. Risk is uniquely different from uncertainty and volatility. For each investment, PeerInvest provides a private placement memo, which goes into the specific risks of each property and offering at length. The three types of risks that we perceive to be involved with Real Estate investing in general are Risk of Capital Loss, Risk of Liability, and Liquidity Risk.

Risk of Capital Loss

Capital loss risk is the likelihood that you will lose money on your investment. Your max risk or max loss is your principal. In other words, if you are investing in a property with PeerInvest, your max risk is however much you invested in that property. There are many factors that can contribute to capital loss.

The first factor is devaluation of the property. A downturn in the market, a decline in the area (rising unemployment, population loss in a zip code, increasing crime), or damage to the property can all lead to the property being worth less than when you bought it. Macroeconomic factors such as deflation or rising interest rates can also influence property value.

PeerInvest attempts to mitigate this risk by only listing properties that they believe to be in stable areas. Stable areas are determined by research, site visits, and leveraging the knowledge of local realtors and property managers. Properties are also insured to guard against damage.

The second contributing factor to capital loss are expenses. These may include taxes, repairs, fees, insurance, and vacancies. If your rental property is not generating any revenue or if expenses outpace revenue, you may also face the risk of your investment losing money.

PeerInvest makes conservative estimates on items like maintenance and vacancies so that even in circumstances that stress our financial models, we believe that we can protect against extreme capital loss. We also keep our fees to a minimum and have designed our fee structure to be aligned with investor interests. PeerInvest only makes money if the investor makes money.

Risk of Liability

Liability risk may cause you to incur a loss that is greater than your original investment. This risk may arise from lawsuits. For example, if a tenant is injured on your property and a court determines that it is your fault then it is possible that you may have to pay for damages that exceed what you had initially invested.

PeerInvest accounts for liability risk through insurance but also by using a properly registered LLC as the holding entity for each property. This means that if any liability were to occur, only the LLC can be sued. Investors on PeerInvest have no exposure to liability risk. Furthermore, liability risk from one property on PeerInvest can not spill over to another property.

Liquidity Risk

Liquidity risk is the risk of not being able to convert your property into cash when you need to. For example, if you need money for medical expenses, but nobody wants to buy your house because a global pandemic has kept people away from open houses, you have a liquidity risk. Your property didn’t necessarily go down in value, but you also can’t give your doctor the keys to your house as payment.

Liquidity in Real Estate is generally low, and PeerInvest is no exception. PeerInvest counterbalances some of the risk by emphasizing cash flow, which provides cash on a quarterly basis. Until a secondary market exists, PeerInvest emphasizes to potential investors that the equity they buy is potentially illiquid for several years.

Conclusion

In conclusion, everyone’s risk tolerance is different and it may even vary per category. It’s important to understand the risks involved in investing in any asset and no asset is completely risk free. PeerInvest does it’s best to understand the risk profile of each asset it acquires and mitigates those risks to the best of their abilities. Even then, it’s recommended that investors understand what their maximum possible loss is and if that is something their investing strategy can tolerate. Overall, PeerInvest believes that as an asset class, real estate has a lot of opportunity for minimizing risk and maximizing profit.