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2.2 Mitigating Risks

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Questions and Answers

What is the goal of mitigating risks in real estate investment?

To maximize the impact of risks

To lessen the severity of risks or avoid them altogether (correct)

To ignore the risks and proceed with investments

To increase the volatility of outcomes

How can an investor mitigate interest rate risk when investing in a property with an adjustable rate loan?

Invest in multiple properties with adjustable rate loans

Ignore the potential impact of interest rate changes

Swap out the adjustable rate loan for a fixed rate loan (correct)

Increase the adjustable rate loan amount

What is a common strategy for mitigating entitlement risk in real estate investment?

Relying solely on the volatile outcomes of entitlements

Buying an 'option' from the landowner to pre-agree on a purchase price if entitlements are achieved (correct)

Purchasing land without considering entitlements

Avoiding land without entitlements

What happens if an investor fails to achieve entitlements after buying an 'option' from the landowner?

<p>The landowner keeps the money for the option and the land</p> Signup and view all the answers

Which of the following risks is most likely hardest to mitigate?

<p>Political risk</p> Signup and view all the answers

Study Notes

Risk Mitigation in Real Estate Investment

The goal of mitigating risks in real estate investment is to minimize potential losses and ensure a successful investment.

Interest Rate Risk

To mitigate interest rate risk when investing in a property with an adjustable rate loan, an investor can consider fixing the interest rate through a swap or a cap.

Entitlement Risk

A common strategy for mitigating entitlement risk in real estate investment is to enter into an option agreement with the landowner, which provides the investor with a negotiated period to obtain necessary entitlements.
If an investor fails to achieve entitlements after buying an 'option' from the landowner, they typically forfeit their deposit and the option expires.

Types of Risks

Entitlement risk is considered one of the most difficult risks to mitigate in real estate investment.

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Description

Test your knowledge of real estate risk management with this quiz. Learn about identifying, understanding, and mitigating risks in real estate investments.