When the market is good and investors are doing well, we sometimes forget the basics of investing — or perhaps things were so good investors never had to learn them. Sometimes (like with crypto and Bitcoin) a bit of FOMO creeps in and we don’t do as much homework as we normally would.
When the market turns and goes poorly — deals go belly up and some investors lose money. In the days of social media and online presences, blame is quickly tossed around — sometimes deservingly so.
Everyone gets to play Monday morning quarterback, identifying problems or fault that may have been obvious or invisible before a market decline.
I’d like to start the year fresh and get back to basics — identifying steps that I think all investors should take on any new investment. And what not to do…
What some sponsors don’t tell you about investing…
- Don’t believe everything you read. Do your own homework, learn how to understand an offering, and become an accredited investor if you can.
Anyone can invest in stocks, bonds, and mutual funds, but there’s a whole range of assets that are off-limits to everyday investors — private market investments like real estate. You must be an accredited investor to participate in unregulated or private deals, meaning you have the financial capacity and knowledge to handle higher risk.
An accredited investor is defined by the U.S. government as someone who meets certain financial criteria to invest in private placements and other sophisticated offerings.
- Work with a sponsor that has been in business for a while. Preferably one that has seen multiple market cycles and worked through 2008 or earlier. While supporting new sponsors is great, it comes with risk. Experience matters — especially when protecting capital in volatile markets.
Ask how the sponsor performed during downturns like 2008 or COVID. True real estate investments require careful planning to reposition or develop an asset for value creation. Be wary of sponsors promising “lipstick flip” riches.
- Avoid pitches that suggest you can get rich overnight. Real estate is not a get-rich-quick scheme. It’s a process built on patience, fundamentals, and compounded gains over time.
- Understand the capital stack. Learn how a sponsor uses mezzanine or bridge debt. If mezzanine debt is secured against a property that falters, a secondary lender can default the borrower before senior debt does — typically leading to loss of capital.
- Ask about liquidity and cash reserves. When markets tighten, cash is king. A sponsor must maintain adequate liquidity to withstand capital calls or lender defaults that can bankrupt an investment.
- Define your goals. Many investors fall into one of three categories:
A. Capital Appreciation: Growing retirement or savings through long-term real estate value increases. Using 401(k) or retirement funds via Self-Directed IRAs is a popular trend.
B. Tax Incentives: Strategies like bonus depreciation, 1031 exchanges, and interest or depreciation deductions that offset active income.
C. Passive Income: Quarterly cash flow from stable assets — the concept of “making money while you sleep.”
- In closing: The key to investing is diversification — blending asset classes, spreading risk, being conservative, and staying patient. The turtle always wins the race.
Best of luck to everyone on their investment journeys in the new year!