A few weeks ago, a close family member came to me for some financial brainstorming. He had just received a large windfall from the sale of his Chicago-area home. We opened the conversation joking about all the frivolous things he could do with the money. As the conversation moved toward serious, we arrived at a juncture where he clearly wanted more than my advice. He wanted my help.
For financial planners, syndicators, flippers, landlords, and lenders, this is the moment you work toward. Someone trusts you enough to open the door and put the money on the table. The best among us are the ones who recognize and seize this opportunity.
The thought immediately flashed into my mind. I happen to know a deal that could use $100k in funds. Conventional wisdom says I’m the guy who can push this over the hill and assure the project gets funded. It’s perfect, right?
Today, I want to discuss some cases where you should take pause before you take funds.
Some investors will ruin your life, and in some cases, you’ll ruin theirs.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Minimal Risk Tolerance
The classic archetype for a tough sell. Unfortunately, some high volume producers will see this as a challenge rather than a warning sign.
Undoubtedly, great money has been made pushing people beyond their level of risk tolerance. Just remember, we’re talking about friends and family here. People you will see again.
Some of the signs: Overtly conservative investment strategies like certificates of deposit, treasury bonds, or cash. Others have problems with institutional trust (banks, government, other people). Analysis paralysis throws low-risk types into a downward spiral. They lie awake in bed at night considering all the worst possible outcomes.
These investors will be most eager to point out your faults and take issue with minor setbacks. It shouldn’t shock you. They are trying to confirm their gut instincts.
You’ll meet and know many folks in this category. And you know what? They’re better off with an easier choice, something they trust. People hate being forced into a decision, even a good one. When you get one of these investors in the door, they’ll spend the rest of their days finding a way out while losing sleep.
High Liquidity Needs
We tend to know who these people are. Sometimes it’s the case of their own financial vulnerability. In many cases, it’s occupational. Small business owners always need cash reserves. Missionaries and digital nomads travel through occupational hills and troughs. People with big (and growing) families run new, daring financial plans every year.
For some, a seven-year hold period is like an eternity. You’ll know the friends who tend to deposit, withdraw, and redeposit 60 percent of their savings through the year. For some people, this is just their nature.
The worst situation is for these investors to treat you like the bank. Attempted withdrawals and the repeated bother. Even if you get them to the end of the line, you’ll be exhausted. For their part, they may not even appreciate the return on their money. They lost something else they valued and did not even realize: flexibility.
Some people do not understand why landlords would rent to working class tenants in B and C-class neighborhoods. The media has led many to believe that real estate investing is buying luxury condos at retail price in Manhattan or San Francisco. Flipping TV shows have further divorced would-be investors from the drudgery of contracting and rehab. Some investors get the basics but expect unbelievable numbers out of a market that cannot support the rate of return.
For these folks, the debate is not worth it. Intrinsic value and income analysis is not fact, it’s partially belief. Investors have a way of seeing value in places where it’s unpopular. Private equity groups, Berkshire Hathaway, and smart landlords understand the intrinsic and unexpected value proposition. For investors who are unrealistic, it’ll be hard to get them back to earth. They’ll always “know a guy” who got an unbelievable return on investment in the local market.
Recommend the best literature you can, and help them in the way they’re comfortable. These investors will be critical of your choices and likely to seek other locations for their money in the future. It may take a market crash or failed investment before they heed your advice.
Verify and Keep Moving
Get used to these encounters. If the pessimists have anything to say about it, the above is representative of 80 percent of the public.
You’re stuck with the family you got, and it’s hard to make new old friends. Do not ruin these relationships with an ill-fitting investment. Always keep in mind what an exit would look like. If you can’t say “we lost everything,” then it’s not the right person for your deal.
Investors: What are your thoughts on using other people’s money? When is it a good idea and when can it spell disaster?
Leave your comments below!