This is Number 1 in a Series of Articles that we will be highlighting in the next few months on Investment Property and the strategies to help make you successful at it. Though it is generally aimed at the small investor, a number of the strategies may have an impact on professional investors.

Past clients often ask me about investment property strategies. In particular, they are interested in the best way to minimize market risk, that is, the risk of sudden and potential violent changes in either rental conditions or the risk of damages caused by rentors. The latter is often covered by three things: the law, a damage deposit and luck! It is the former that can be somewhat protected against by good strategy.

The answer to minimizing rental market risk is not what you might think it is. In my experiences with clients and in my own ventures the answer is exactly the opposite of what you might think…protecting yourself in investments is maximized by developing your exit strategy before you exercise your entrance strategy: understand what it is that will make you sell before you buy!

You might be turning in your seat thinking that this is insane…how can you minimize risk by developing an exit strategy since everyone seems to saying that real estate investment is a long-term device? Well, those people are right so long as you have the financial wherewithal to handle potentially long spells of oversupply of rental property within your area or long-term shifts in demographics that will eat away at your investment. Holding onto a declining property for the sake of holding it is NOT a good strategy… it is paralysis! Holding onto a declining property because you have logically concluded that the market is set for a turnaround is common sense. Is it possible that your analysis is wrong? Of course, the difference is that you have made a sound investment decision based on factors that you know rather than depending on out-dated investment wives-tales.

There are two things that you have to understand before you purchase an investment property:

• Your "Pain Threshold"; and
• Your "Gain Threshold".

Your "Pain Threshold" refers to your ability, be it financial or emotional, to withstand potential decreases in market value, rentor risk and rental expenses. This is an individual decision that only you can make but here is the key….make it up front and reevaluate it every year! Once a "pain receptor" is activated (for example the property is vacant for 2 months straight) it should trigger or activate your exit strategy. This is not the same as a "panic" sell…this is YOUR controlled, managed and expected exit from your property.

Your "Gain" Threshold" is the opposite but perhaps more important concept. It is always easy to see that you should exit when the factors are lining up correctly. What do you do when things are going well? The answer most people will give is…nothing but, unfortunately, there are plenty of horror stories of people hanging on to property for TOO long and getting burned at the market peak as it turns down.

Psychologically it is more difficult to sell a positive investment than to sell a losing investment. It's the reason why markets fall faster than they rise. But, the most successful investors often take advantage of market growth and sell into a growing market (this is the same concept as in the Stock market). What they effectively do is take advantage of inflated prices and expectations and shift the risk to people who want in at any cost as the market peak approaches. Then as the market peak hits these people are left holding more risk because capital gains are no longer available.

How can you minimize this potential risk? The answer lies in establishing certain goals to meet and deciding before investing that you will consider selling once those goals are realized. You do a market assessment at that time and make the decision as to whether market conditions are changing and whether you should sell.

Ron Thibeault is a retired real estate lawyer and contributing Editor to ThinkRelo.com. His extensive experience in real estate law gives him valuable insight into the needs of clients, realtors and all other players in real estate transactions.