Investing is vital for financial survival and to be able to thrive. Yet, the results you get, and how well your investing meets your needs and goals come down to making good investments. You don’t have to hit the jackpot every time, but you do need to know how to avoid critical investment mistakes.
Here are three of the most important red flags private real estate investors need to watch out for when picking their next investment.
Promise Of Returns That Seem Wildly High
It is important not to be fooled into returns and yields that are too lean. As after fees and taxes you could easily be in the red. However, promises of wildly high returns are often a red flag of extremely high risk as well.
When you start seeing advertisements for returns of 50% or 70%, then you can bet it is highly risky.
Not that high double-digit returns aren’t possible. Though experienced investment managers often tend to underpromise so that they can over-deliver, instead of overpromising.
What is far more important than the return on your investment, is the return of your investment. Remember, that the first rule of investing is not to lose money. Invest with strong collateral for your capital, so that you can continue to reinvest it, and grow it.
Lack Of Documentation To Back Up Claims Of Experience
It is insanely easy to make big claims today. Anyone with a couple of dollars or a credit card can print glossy investment prospectuses, make up graphs about past performance, create YouTube videos, put their articles and press releases on news websites, and pose in front of luxury cars and homes on Facebook.
These are not measurements of success or a strong investment. Often it is quite the opposite. Beware of this over-compensating.
Real investment operators and managers should be able to back up their claims with a paper trail of documentation. One that shows the assets they’ve been involved in, own, and some real performance metrics which can be verified.
If they start stuttering or throwing out diverting statements, and try to brush off these questions, it may be a red flag.
The Promoter’s Interests Are Not Aligned With Yours
To be confident in the intentions of a sponsor or financial advisor, their interests should be aligned with yours. It’s even better if they put your interests first, ahead of theirs.
Where this doesn’t exist has been where the biggest problems and controversies have arisen in recent years. We’ve seen some banks and investment firms seek to fire their customers when regulators have told them that they need to act in the best interest of their customers.
This issue can be obvious when fund managers are selling you one type of investment, i.e. public stocks, and then putting their earnings from your fees, and their money into different types of investments, like real estate. Or when they are charging fees that do not incentivize them to produce results for you.
Instead, look for investments where you may get preferred returns, or get paid first. Or at least where the promoter and advisor are investing their own money alongside yours.