The Math Behind: Risk Management in Real Estate

Risk Management: involves identifying the potential events that can have adverse financial/emotional consequences for an investor.

 Risk Aversion is when an investor would rather a lower return with a lower risk since they are avoiding risk.

YouTube: https://youtu.be/ptDxTw7A5oA

Types of Risk faced in Real Estate:

1) Property Risk: the risk associated with the destruction of the property

2) Speculative Risk: the risk associated with the future value of an asset

3) Input Risk: the risk associated with increased costs and maintenance of a property

4) Liability Risk: the risk associated with the reckless actions of others.

 

What Math is involved in Risk Management?

Expected Value provides the anticipated value of an investment in the future using different probabilities (scenarios).

 

References: https://corporatefinanceinstitute.com/resources/knowledge/other/expected-value/ https://www.westfield.ma.edu/math/MathWeb/Actuarial/PDFs/342-Intro-to-Risk.pdf