Not All Good Deals are Good Deals

I cannot tell you how many times I have been approached with a "good deal" over the years.  Not just in real estate; all kinds of investments, opportunities, and ventures.  Some I am glad I didn't take (looking at you, latest multi-level marketing craze), some I wish I had jumped on when they came to me (Bitcoin at $10 . . . sigh).  But just because a deal is good does not mean it is going to be helpful or beneficial.  No opportunity should ever be accepted simply on its own "goodness."  An investment has to match your goals, and just as importantly, your personality.

So how do you initially discern if a deal is good for you or not?  If you have ever spoken to a financial advisor, hopefully they ask you about "suitability" (if not, run away).  In short, suitability is the process of matching an investment to a person's goals, life circumstances, and risk tolerance.  The questions below should be the initial filter you can use to assess whether or not to move forward on any investment.

These are the same questions I ask when meeting with clients.  While there is no right or wrong answer to the questions, how you implement the answers can have a drastic impact on your success.

- What is your goal?

This may seem obvious, but it is amazing how many people invest without knowing the answer to this question.  Strangely enough, whenever I have asked people why they are pursuing an investment, the most common answer I got was, "Because [someone else] told me I should."  Your investments have to match your goals, not someone else's.  Whether it is paying off debt, having multiple streams of income, saving for kid's college, or providing a legacy for generations to come, you have to know why you are doing what you are doing.

- What is your source of capital to invest?

Knowing your source of capital is probably the easiest question to answer.  Is it your own money, or other people's money?  If it is your own, where does it come from?  Savings, other investments, inheritance, and extra income are all normal sources.  If it is other people's money, that could include private money (friends and family), lending (whether traditional or alternative), or leveraged.  Knowing ahead of time where your capital is coming from will tell you a lot about how much risk to take on, let alone if you should even risk it.

Normal disclosure: not all investments will let you use just any source of money.  For example, you cannot use a credit card to buy shares of a mutual fund.  Be smart when leveraging.

- How long to do have to invest?

Timeframe is a key metric to know whether an investment is a good opportunity.  Generally speaking, the longer you have to invest, the more risk you can take on (subject to the answers in the other questions).  Why is that?  If you have a long time to invest but lose a significant amount of capital early on, the odds are higher that you will be able to recoup that loss.  The inverse is also true.  Less time to invest generally means less risk.  An elderly couple I know lost a significant amount of money because they were put into an investment with a twenty-year time horizon when they were in their seventies.  Had they asked me, I could have told them just how unsuitable that investment was for them and saved them years of extra work and heartache.

- How much risk are you willing to take?

How much risk you are willing to take is perhaps the most difficult question to ask.  Everyone loves it when an investment returns hoards of money like the dot-com boom in the 90's or housing in the 00's.  It is great fun!  However, the busts hurt bad and are where one's true risk tolerance is really tested.

Historically, risk/return percentages look like this:

     - Low Risk: +/- less than 3-5% per year

     - Moderate Risk: +/- 5-10% per year

     - High Risk: +/- 10% per year

Equally as important is just answering this: what does your stomach do when someone says "high risk"?  If you get queasy, then it is probably not for you.

- How involved do you want to be?

Like most everything, one's level of involvement in an investment comes with certain benefits.  Whether or not to have a Property Manager on a rental is a prime example of this.  You can run your own rentals, but there is a time cost involved with doing so.  Having a PM may free up some time, but it can give up some control.  There are pros and cons to how involved you are.  Only you can answer what the right balance is.

Having a firm answer to these questions can allow you to quickly ascertain whether every "good deal" that comes along is actually going to get you to where you want to be.  Happy hunting!