Today, I’d like to CONCLUDE OUR VIDEO SERIES on discussing the important topic of Should I Invest in My Friend’s Real Estate Deal?
First, let’s discuss What to look for: If you made it this far in the video series and are still not convinced that you should avoid your friend’s offer to invest in his real estate project, then you should at least attempt to assess the deal being proposed. You can start by asking for some basic information, which will help assess whether this is a legitimate opportunity or just a way for your friend to speculate with your money. Here are a few due diligence factors:
Audited ten-year track record:First, ask him for an audited performance track record from all the deals he has worked on over the past ten years. If he doesn’t have at least a decade worth of experience, where he saw different market cycles, or can’t provide an audited track record from a legitimate third party (i.e. a major accounting firm), then you should avoid the project.
Next, Eating his own cooking:If he can provide these pieces of information and the numbers are satisfactory, then ask him how much of his own money he is putting into the project. Never trust someone who won’t invest a significant sum of their own money in the investment they are proposing.
There are also Other factors:The next form of due diligence is personal. If everything else checks out, you need to make sure this real estate project is suitable for your needs. Ask yourself the following questions:
Will this investment help me achieve my goals?
Does this investment make sense relative to my overall portfolio?
What are the tax ramifications?
What is the term of this investment?
Assuming all these other items check out, perhaps you will want to proceed. Though I’d still suggest investing only a small portion of your overall portfolio, as is prudent with any speculative investment.
Here’s the bottom line: The truth is you can live your whole life, achieve all your goals, and amass a fortune, without ever investing in any special deals with “family and friends discounts,” “mid-teen returns,” and special “access” granted to you by a benevolent friend. Anything you want to accomplish in life can be done in the public markets, which offer liquidity and transparency.
Keep in mind that the key to successful investing is NOT trying to achieve the highest possible returns. Rather, it’s the ability to reach your financial goals. Increasing the probability of achieving your goals is done primarily by minimizing investing missteps.
The reality is that most of these deals turn into financial disasters. The project implodes, the returns are drastically lower than anticipated, or something else doesn’t go according to plan. Most people would benefit from having a policy to stick to a well-diversified portfolio of publicly traded securities and let compounding work its magic.
Let the big machers in your community participate in these “opportunities.” You can stick to boring plain vanilla investments and achieve everything you want in life with much less stress and risk.