Updated: Dec 13, 2020
Investing in real estate can seem like an overwhelming endeavor. There are so many different asset classes and strategies, so many financing options, so much information out there, so much to learn! You’re also dealing with large sums of money. For most people the purchase of a primary home is the largest investment they will ever make and seasoned real estate investors do these kinds of investments and larger on a daily basis!
Dealing with large sums of money in an arena where you don’t know everything can be intimidating and causes many potential investors to run for the hills. In fact, many people feel like they need to know EVERYTHING before investing. This couldn’t be further from the truth. Honestly, it’s impossible to learn everything before your first investment because you can’t possibly predict every scenario you might run into in your first deal. It’s also unnecessary. There might be some creative financing strategies you don’t understand, but if you’re not using one of them to get your deal done, there’s no point in saying you won’t move forward until you learn them. This isn’t to say you should invest blindly without knowing anything, but trying to be an expert on every facet of real estate before doing a deal is what is known as “analysis paralysis” or overanalyzing.
Think about it like working on a car. You don’t have to be a fully licensed mechanic with 20 years of experience working on various makes and models of cars to put gas in the tank. It’s not necessary for you to know what the coolant temperature sensor is, where it’s located or how it works in order for you to change your oil. Real estate is no different.
A lot of new investors try to learn everything about real estate in an attempt to avoid risks. The simple truth is that there is no way to completely avoid risk. Risk can be mitigated, but it can’t be avoided. Even holding treasury bonds, widely considered the safest investment vehicle on the market, still carries a risk, albeit a very low one. The key is not to avoid risk completely, but to take CALCULATED risks.
Now you may be asking yourself “If I’m not supposed to know everything about real estate what am I supposed to know? What should I be researching?” - this is a great question and brings us to one of the keys to investing in real estate - the power of strong partnerships. At the end of the day, large real estate deals are a collaboration between many different people each of whom hold the knowledge of one piece of the puzzle. By partnering with a reliable team that you trust, you mitigate your risk by making sure your investment is in the hands of experienced sponsors.
Vetting your sponsor is the most important research you can do. A good sponsor will have vetted deals and markets thoroughly and have connections to the experts needed to make a deal successful. They will be able to identify key risk factors and make sure that these are mitigated. Sponsors provide expertise and experience so that you don’t have to be an expert. A partnership with a strong sponsor will allow you to benefit from their knowledge and expertise and the result will be a more successful, and less stressful investing journey. In addition to verifying a sponsor’s expertise and experience, it’s also important to verify that they operate with integrity. A sponsor that operates responsibly and with good ethics is of tantamount importance. Finally, it’s important to make sure a sponsor’s interests align with your own. If a sponsor does not have “skin in the game” or if they take disbursements before their investors they may not be a good match. While it is customary for sponsors to collect some fees at various stages, the bulk of their compensation should be tied to deal performance. These last two points are of the utmost importance in the current investment environment due to the volatile nature of the financial markets right now. As an investor, you want to be able to sleep soundly knowing that your trust your sponsor to do their best work.
Always remember, Success is a journey, not a destination. Don’t use “I don’t know all the details” as an excuse. All you need before your first investment is to find reliable sponsors.
Invest with Confidence.
Yan Yan and Andrew Brewer
Sharpe Investor Group www.sharpeinvestorgroup.com
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