CEO of CFSI Brian Mingham on Risk Mitigation & Portfolio Management
Risk mitigation is most commonly associated with the construction of financial portfolios, but also plays a key role in business. In the latter context, it’s used to assess potential risks to project schedules, performance and cost, and to develop strategies to limit or counteract those risks.
Risk is inseparable from not just business and investing, but nearly all aspects of life says Brian Mingham, the Founder & CEO of construction risk mitigation company CFSI Loan Management. He notes that risk mitigation can lessen risk but never eliminate it completely.
Risk should not be judged as inherently negative in terms of portfolio management, but rather as a measure of volatility, which can be good or bad. That explains why hedge funds which generate greater alpha (which increases risk), can charge higher fees.
In the finance industry, risk managers are used to calculate a portfolio’s risk. They do so use several key measures, including the portfolio’s alpha and beta, its standard deviation, and its Sharpe ratio. These and other calculations are applied not only to stocks, but across all asset classes contained within a portfolio, including real estate.
Brian Mingham says that a wide range of factors are considered in making those determinations, including concentration risk, loan risk, construction risk, property type risk, location risk and borrower risk. His firm helps lenders, who are more adept at calculating borrower risk, with their calculations of real estate construction risk, paving the way for permanent financing.
When it comes to interpreting construction risk, CFSI will factor in everything from the contractor’s likely ability to complete the project, to whether the labor and materials have been properly budgeted for. The company has completed more than 39,000 inspections, 25,000 draws, and 10,000 project feasibility reviews.
By providing homeowners and lenders with a detailed scope of the risk associated with a home building project and accompanying loan, Brian Mingham notes that they are able to make educated decisions about those projects and ensure they are getting the most favorable terms. This also allows them to push back against contractors and lessen the likelihood of contractors, subcontractors, or their suppliers filing mechanic’s liens.
In terms of real estate portfolio management, risk can be mitigated in several ways. One of the most important is to adopt a buy and hold strategy as opposed to a fix and flip one, or one geared towards buying for near-term appreciation. A buy and hold strategy eliminates the risk inherent in being subject to market cycles that tend to be more volatile over shorter periods of time.
Another useful risk mitigation strategy in real estate is to focus on properties in the middle tier, or so-called “Class B” properties. In a hot economy, people will be trying to move up from Class C properties, while during a downturn, people will be clamoring to move down from Class A properties. Thus, regardless of current economic conditions, these properties are likely to be in relatively high demand and retain or increase their value.
Given that risk of all types plays such a prominent role in our lives, Brian Mingham says it’s vital that businesses, project leaders, households, and individuals all adopt a risk assessment mindset when it comes to their most important decisions.
By determining the relative amount of risk they’re comfortable with in any given scenario, they can make appropriate decisions accordingly and greatly improve their odds of successfully achieving their objectives in business and life.