|
1. |
Never invest more than 10% of
your investable assets into one project.
|
|
2. |
Never invest in an opportunity
which conflicts with your asset allocation formula, no matter how
good the investment sounds. |
| |
a. |
This means don't consider
investing in an opportunity unless you decide to commit the time to
understand all the idiosyncrasies of this type of opportunity (e.g.,
if someone offers you a great opportunity to loan hard money, don't
do it unless you have decided to do your due diligence in hard money
loans).
|
|
3. |
Never invest unless the
following meet your criteria: |
| |
a. |
The risk related to length
of time invested (i.e., if the project lasts 36 months, what
risks is your capital exposed to over that period?) |
| |
b. |
The annualized return
(e.g., if you put your money in for five years and then receive 150%
return on your capital, that is not 30% per year, annualized, it is
actually 20% per year.) |
| |
c. |
The annualized return in the
context of the type of investment risk (e.g., a 20% preferred
cash return paid out monthly and secured by a stable income property
would be better than a 20% projected, unsecured return, promised in
one lump sum at the end of a multi-stage, multi-risk three-year
project). |
| |
d. |
The personal transaction
costs and risks in relation to the time period (e.g., I take
money that was previously in a CD account, invest it in a project
for six months, then receive proceeds: this looks like short-term
capital gains, that I'll have to pay taxes on before spending my
time looking for a new investment after only six months).
|
|
4. |
Never invest in any real estate
transaction that doesn't have 35% total equity and cash return to
you in it by the end of the project. |
| |
a. |
For example, you loan someone
$650,000 to buy and finish rehabbing an apartment complex that will
be worth $2,400,000 (at today's prices) at the end of the project.
At the end of the project, there should be at least $840,000 (35%
equity) either still in the building or in your pocket, so if the
market has dropped 15 - 20% you can still pay back the loan on the
property and get your investment back.
|
|
5. |
Ask yourself these questions: |
| |
a. |
How long have the people
running the investment or company been in this type of investment or
business doing what they are doing? |
| |
b. |
Have they done this kind of
project before? |
| |
c. |
Have they been successful doing
this for sometime in the past? |
| |
d. |
Ask for references.
|
|
6. |
Invest only in projects where
the person bringing you the opportunity and the other principal
partners has his/her own money invested. |
| |
a. |
Make sure the principals will
experience more pain than you if the deal goes south. |
| |
b. |
Consider a minimum 5% of total
capital (including bank loan) or 2 1/2% of total capital plus full,
personal Guaranty of minimum 50% LTV bank loan.
|
|
7. |
Always have the terms of the
deal in writing and make sure there is an exit strategy and the
entities are set up for the best tax and exchange situations.
|
|
8. |
Don't invest in a deal because
others are doing it. |
| |
a. |
Do your own due diligence and
make sure that the people your trust to help you with your due
diligence do not have an interest of any kind in the deal itself. |
| |
b. |
Run the numbers and make sure
you believe they make sense. If you are not confident in
running the numbers, get someone on your team to do this for you and
have them give you their evaluation of the deal. |
| |
c. |
As part of the due diligence,
consider doing the following: |
| |
|
i. |
If this is a
security being offered (most private placement memorandums are),
check with the State's Attorney's Office to see if there is any
problem with the securities or the company offering them. |
| |
|
ii. |
Run a credit
check on the company offering the investment. |
| |
|
iii. |
Inquire at the
Better Business Bureau for complaints. |
| |
|
iv. |
Search the Web
for articles and chat room gossip about the company.
|
|
9. |
Invest in only deals that you
are a principal in or someone you personally know and trust (not a
person that one of your friends trusts) is a principal in the
investment.
|
|
10. |
Never break more than one of
the rules 1 - 8 and never break rule #9. |
