Real Estate investing is not the same as professional gambling but there is a concept that gamblers use that real estate investors can learn from. It's called "bankroll management". The objective is identifying the amount of money a gambler can put at risk for a given game without risking that he or she will lose so much capital that that they won't be able to bankroll another game. The goal is that if they lose this game, they'll still be able to bankroll another game and over time their bankroll grows although they acknowledge they won't win every time.
If a gambler has $10,000 in capital, he or she may decide they can afford to risk $1,000 in a single game. The next decision needing to be made is how high of a poker pot buy in the gambler can afford. Sitting down at a poker table with a $500 buy in would be extremely risky. Within two short hands the gambler could be out of this game although he would still have a reserve bankroll for a future game. Getting into a game with a $50 buy in would be much less risky and better bankroll management.
While real estate investing isn't gambling, for real estate investors the stakes are even higher. In addition to their own investment, they often put borrowed money on the table. The key to an investor's bankroll management is not committing to a deal that exceeds their financial resources. Also, similar to the gambler holding a reserve that he or she doesn't take to the table, an investor is wise to hold a reserve fund. The reserve fund will keep the investor in the game when unexpected expenses come along or when there are times a rental property sits vacant. Like the gambler, the investor expects his bankroll to grow over time but plans for the occasional down turn.
Many new investors go into a deal by calculating the current or projected rent of a property and then subtracting out all of the known expenses. An experienced investor will take bankroll management one step further. They will calculate what percentage of other income will be required to pay the expenses on a property if it sits vacant for a period of time. The other income could be from other investments or their personal income but there must be a cap to insure good bankroll management.
For a new investor, this is almost certainly going to be their personal income. If the person brings home $3,000 per month, how much can they afford to pay the expenses of a vacant investment property? Just 15% of the take home pay amounts to $450. If the new investor calculates their personal living expenses and finds they can get by on $450 less each month, they have found their investment threshold. They can invest in a property with vacant expenses at or below that level. Still, good bankroll management is having a reserve account to cover unexpected repairs and costs.
As an investor gains experience, they learn to look at the down side of an investment opportunity as well as the up side. This increases your chances that your bankroll will grow instead of taking a gamble that your investment will lead you to bankruptcy.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.