Today, I’d like to START A NEW VIDEO SERIES on discussing the important topic of Should I Invest in My Friend’s Real Estate Deal?.
So, I received the following question recently, and it went as follows: A friend approached me in shul a few weeks ago, offering me access to a unique real estate deal where he can get me a family and friend’s discount. Returns are expected to be about 15%. He mentioned a few people in the community who invest with him. They are all sophisticated physicians or attorneys at major firms, who are financially successful in their own right. The fact that he attracts sophisticated investors is a good starting point for my own due diligence, but how do I evaluate if this investment is a worthwhile opportunity?
So, I receive a version of this question at least several times a month.
In fact, In the frum community, more investment dollars have been lost from participating in “deals” pitched by friends and family members than anything else. Of course, I don’t have years of data to support this assertion, but, anecdotally, it’s hard to find someone of means who has not at some point set their finances back by getting involved in an investment scheme pitched by someone in their social circle.
That being said, let’s dissect what I know about your scenario and offer some thoughts about how to evaluate these opportunities going forward.
First let’s discuss general rules on Investments to avoid: Many viewers may not have a background in investing and financial planning. However, you do have intuition. If something seems too good to be true or gives you an unsettling feeling, then take your time to get a second opinion or avoid it completely.
A good rule of thumb is to avoid investment schemes where any of the following phrases are used in the sales pitch:
1) “Access” to a unique opportunity
2) You will receive a “friends and family discount”
3) Advertising consistent “mid-teen returns”
The questioners friend said all these phrases. Ask yourself: Why are you so fortunate to be presented with such a unique opportunity? It’s not because you are special or that your friend likes you more than others. It’s likely because he needs your money and other pools of capital have dried up. Unless you have some information that supports why this real estate project is better than all the other ones that go south every year, I’d avoid it like the plague. If you invest, at best you get your money back with a small return. However, the more likely scenario is you won’t see your money again.
In my next video I will discuss two other aspects of this question to help assess whether the “deal” makes sense.