Chances are, even though risk generally is top of mind when it comes to investments, many investors are even more aware of it given current market conditions.

Like any investment, real estate investment is not entirely without risk. But by being aware of risk-adjusted returns, investors can make sound decisions that complement their broader strategy.

Considering the “risk-adjusted return” of an investment allows investors to weigh the return of that investment against the risk of producing that return. With that metric, investors can decide if the deal fits their risk tolerance.

For instance, multifamily investments with a lower degree of risk may forecast internal rates of return that are less than those with a higher risk. Risk and return can be highly correlated, especially in real estate.

So, what’s the best way to measure risk? It can be both qualitative and quantitative.

Let’s start with the numbers. To determine risk associated with an investment, start by identifying the projected return on the target investment property. Then subtract what you considered the “risk-free rate” in the market – the rate on a 10-year Treasury bond, for instance. The excess difference between the two will provide investors a sense for the risk-adjusted return. Investors also can take a different quantitative approach and compare the return on a projected real estate investment property to the return on a composite of stock market indices.

Want a more qualitative approach? There are many in real estate. 

Start by considering a property’s age – often, the older it is the riskier it is – as well as its location. Markets matter, and if a property is in a location with unfavorable demographics and a fundamentally challenged economy, that creates risk.



Asset class matters, too. Historically, some commercial real estate assets have been less risky than others. Other asset classes including hotels and restaurants have been more volatile.

The tenant base is key as well. Tenants with stable financials and a record of steady payment make an investment less risky and a property less prone to vacancy. Lease terms are key as well. A multifamily property that allows month-to-month leasing can present more risk than one with longer lease terms.

And, of course, the team developing, leasing and managing investment properties plays a significant role in mitigating risk. Choose an established firm with the scope and scale to brand and market the property, proactively address occupancy, handle any maintenance needs and address tenant issues.

Many investors also find taking a passive approach with their investing further addresses risk. 

While no investment is without risk, working with developers and managers who practice the right fundamentals and ongoing attention to real estate assets allows investors to invest with confidence. 

At Redwood Living, Inc., multiple factors are in place to expertly manage its properties. As an innovative developer and manager of single-story apartment homes, Redwood enjoys a 30-year history of outstanding occupancy in carefully chosen markets while maintaining top talent as a recognized best place to work. To learn more about investing with Redwood, call 216.360.9441 or fill out a contact form.