To Know Your Risk is to Love it (Sort of)

Updated August 2026

To Know Your Risk is to Love it (Sort of)

If you fly anywhere in an airplane, you probably know your risk of death is far lower than during your drive to the airport. Still, many of us are deathly afraid of airplanes (it’s just unnatural to get to 30,000 feet in the air, isn’t it?), while how many of us are really worried while texting and drinking our to-go coffee that our morning drive will be fatal?

Not to be morbid, but most of us have no real notion of risk. In investing in real estate, however, we should not only consider the risk but embrace it.

By “embrace” it, I don’t think that any of us really want to give risk a big hug. We would rather risk as little as possible.

But as we all know, there are risks not only in everyday life, but in the investments we choose to take on.

So perhaps in the spirit of “knowing yourself,” you should prior to buying anything else realize your own spirit and appetite for risk.

Know Your Risk, Know Your Portfolio

Your emotional relationship with risk is not just psychological, it’s financial. The decision to invest in real estate isn’t about picking the best property; it’s about aligning your investment strategy with your risk profile.

Consider this: the average U.S. household has a DTI (debt-to-income) ratio of 37%, which is considered the upper limit for sustainable borrowing (Federal Reserve, 2013). If you’re already near that threshold, taking on a high-leverage real estate purchase could push you into financial distress during a downturn.

Meanwhile, credit reporting agencies like Experian and Equifax track consumer credit behavior. In 2013, the median FICO Score was 675, a number that determines not just loan approval, but the interest rate you’ll pay.

Take Chase Bank, for example. Their mortgage products in 2013 offered rates starting at 4.2% for borrowers with a FICO Score above 740. For those with scores below 660, the same loan could carry a rate of 7.1%, a more than 60% difference in annual interest. That’s a $1,420 annual difference on a $200,000 loan, or about $118 per month, money that could otherwise cover property taxes or repairs.

If you have a 620 score and need about $8,000 for a down payment on a rental property, you’re likely to face a rate closer to 7.1% rather than 4.2%. That’s not just a higher payment, it’s a narrowing of your margin for error. If the property doesn’t rent within six months, that added interest could eat into your first year’s cash flow entirely.

Even with strong income, a low score can force you into higher-cost financing. The CFPB notes that in 2013, nearly 60% of borrowers had a FICO Score below 700, meaning they were not eligible for the best rates and often had to rely on higher-cost lending options like subprime lenders.

And that’s where risk becomes real. A $200,000 home with a 20% down payment may seem safe. But if the property is in a market with rising vacancies and a weak job base, that “safe” investment could turn into a $150,000 loss in three years.

Why Risk Tolerance Isn’t Just a Feeling

Risk tolerance isn’t a personality trait you can dismiss. It’s a quantifiable factor that affects everything from your loan terms to your exit strategy.

The Federal Reserve’s 2013 data shows that the average interest rate for Direct Subsidized Loans for undergraduate students first disbursed on or after July 1, 2013, was 6.8%. For loans disbursed earlier, that rate was 3.4%, a difference of over 3 percentage points in just one year, illustrating how policy shifts can alter financial risk exposure.

These rates are not just academic. They reflect how the government adjusts risk pricing based on economic conditions. When interest rates rise, borrowing costs increase, and real estate investment becomes more volatile. When they fall, access to capital expands, and so does risk-taking.

Credit risk is not a new concept. The FDIC reported in 2013 that U.S. banks had $3.8 trillion in outstanding mortgage loans, with a 1.2% delinquency rate, a number that fluctuates based on employment, income, and housing market health.

Real Risk in Real Life: The Case of Clyde

I know a Florida investment counselor who is very conservative in his personal life. Call him Clyde. He is the type who will tell you to always plan for a rainy day, no matter what type of investment you are involved in (real estate is his specialty but he handles other types as well). He tells retirees to use their money carefully so that they don’t have to meet his ultimate fate worse than death (going back to work to earn enough to live…a worse fate than an early morning car crash or a plane wreck, perhaps?).

So he is very conservative when it comes to investments. But he is not so careful about his hobbies and lifestyle. He gets into planes and voluntarily jumps out of them (with a parachute, of course, but what if it does not open? That happens often enough to be a concern).

Clyde knows the risks of his chute not opening (his odds are good that it will be no problem), and he knows the risks of all investments he suggests to his clients.

I don’t know about you but in my own case, I would prefer less risk in both investments and lifestyle (no airplane trips unless I am a passenger and as little risk as possible when buying and selling real estate).

The point here, however, is to know your risks and realize in all honesty that it will play an important role in what types of investments you prefer.

Separating Personal and Professional Risk: The Branson Effect

I do think of obvious examples of risk-takers who do so professionally and in their personal lives. The head of Virgin Air, Richard Branson, comes to mind immediately. Branson takes risks in all his activities ranging from ballooning to space tourism. He seems to embrace it.

But here’s the key: Branson isn’t a passive investor. He’s a founder. He controls the outcome. That’s different from someone who buys a rental property in a volatile neighborhood and hopes for appreciation without oversight.

When you invest through a lender like SoFi or a credit union, your risk is tied to your credit history. The CFPB reports that in 2013, nearly 60% of borrowers had a FICO Score below 700, meaning they were not eligible for the best rates and often had to rely on higher-cost lending options like subprime lenders.

And that’s where risk becomes real. A $200,000 home with a 20% down payment may seem safe. But if the property is in a market with rising vacancies and a weak job base, that “safe” investment could turn into a $150,000 loss in three years.

This framework doesn’t work for everyone. If you’re nearing retirement, have limited emergency savings, or rely on fixed income, real estate risk, especially leveraged real estate, can be a poor fit. The market doesn’t wait for your timeline. A sudden job loss or health issue can turn a manageable downturn into a crisis. The CFPB cautions that many people with high tolerance for risk still lack the financial capacity to absorb a loss.

How to Measure Your Risk Appetite

There’s no single test. But certain tools can help. The CFPB recommends that investors use a risk tolerance questionnaire to assess their comfort level with market volatility. These often ask:

• How would you react to a 20% drop in your portfolio?
• Would you sell immediately, or hold through the downturn?
• Are you more likely to invest in stocks, bonds, or cash?

The answers to these questions reveal your true risk profile.

Financial institutions like Chase, Wells Fargo, and Bank of America use these same assessments when offering investment advice. If you’re classified as “moderate,” you might be advised to hold a mix of stocks and bonds. If you’re “aggressive,” you might be encouraged to invest in real estate or small-cap stocks.

But here’s the catch: risk tolerance doesn’t always match reality. Many investors believe they’re cautious, but when markets fall, they panic and sell. That’s the difference between perceived risk and actual risk.

Risk vs. Reward: A Data-Backed Trade-Off

In 2013, real estate investors faced a clear trade-off: higher returns came with higher volatility.

According to the Federal Reserve, the national average home price appreciated by 1.2% annually from 2010 to 2013. But in markets like Las Vegas or Miami, prices dropped by over 20% during that period.

Meanwhile, rental yields varied widely. In cities like Chicago and Atlanta, gross rental yields averaged 5.8%, but in high-cost areas like San Francisco, they were below 2.1%.

So the “safe” investment in one city could be a loss in another. And that’s not a risk, it’s a certainty.

Frequently Asked Questions

What is the average risk of losing my real estate investment in 2013?

The average foreclosure rate in the U.S. was 1.5% in 2013, according to the Federal Reserve. However, in high-risk markets like Las Vegas, it reached 7.8%, showing how location dramatically alters risk.

How does my FICO Score affect my real estate risk?

Your FICO Score determines your interest rate. Borrowers with scores below 660 faced APRs up to 7.1% in 2013, compared to 4.2% for those with scores above 740. This difference can make or break your return.

Can I use a HELOC to reduce my real estate risk?

HELOCs carry an average interest rate of 6.3% in 2013, which can be lower than credit cards. But they are tied to your home equity, so a price drop could put you at risk of negative equity.

What’s the difference between risk tolerance and risk capacity?

Risk tolerance is how you feel about volatility. Risk capacity is how much you can afford to lose. The CFPB notes that many people have high tolerance but low capacity, meaning they’re willing to lose money but can’t afford it.

Is real estate still a safe investment in 2013?

It depends. While the national average appreciated by 1.2% from 2010 to 2013, some markets declined by over 20%. Safety varies by location, financing, and timing.

How do interest rate changes affect real estate risk?

When rates rise, borrowing costs increase. In 2013, the interest rate on Direct Subsidized Loans jumped from 3.4% to 6.8% for new borrowers, making debt more expensive and reducing affordability.

What’s the role of the CFPB in understanding investment risk?

The Consumer Financial Protection Bureau (CFPB) provides data and tools to help consumers understand risk. In 2013, it reported that 40% of Americans had a FICO Score below 670, limiting their access to low-cost credit.

Why do some investors jump out of planes but avoid real estate risk?

It’s called cognitive dissonance. People accept physical risks (like skydiving) because they’re voluntary and temporary. But financial risks feel more permanent and threatening, especially when tied to home equity and credit scores.

Can I change my risk profile over time?

Yes. As you age, income stabilizes, and savings grow, your risk capacity often increases. But emotional risk tolerance may not keep up. The CFPB advises reviewing your profile annually.

How do lenders like SoFi assess risk?

SoFi uses a combination of FICO Score, DTI ratio, and employment history to assess risk. In 2013, borrowers with a DTI above 45% were often denied loans, highlighting how leverage impacts risk.