4 Questions to Ask Yourself Before Investing in a Real Estate Deal

Whether you're just starting or have years of investing experience, you are always on the hunt for the perfect deal. But if someone put the perfect real estate deal in front of you, would you even believe it? Would you even know it was perfect? What questions would you ask? Would you go straight for the investment summary and look at the key metrics like IRR, cash-on-cash, and equity multiple?

In reality, there is no perfect real estate deal, and the pursuit of perfection can lead to stillness and stagnation. Most investors are seeking growth and look to leverage investments to help them progress. What does this mean for you? Are you seeking cash flow to supplement your income in retirement? Are you looking to build long-term wealth? Are you facing a six-figure tax bill and looking for ways to decrease it? Or are you uncomfortable having your life savings in the stock market?

If you find yourself hesitating when reviewing deals, it’s likely because you haven’t clearly defined your investing principles. Without a solid framework guiding your decisions, it's easy to fall prey to analysis paralysis and indecision. That's why you must ask the right questions — ones that align with your personal goals and risk tolerance — before diving into any investment opportunity.

Here are four crucial questions that every investor should ponder before investing.

1. What is your actual goal?

A simple and somewhat obvious question, but one that many keep surface level. Go a couple of layers deep. Yes, we know you want to make money but why? Is it because you have a single-income household and fear what would happen if you lost that income? Are you looking to retire early so you can spend more time with loved ones before it’s too late? If you know the real reason behind your investing goals, it creates more flexibility, and urgency, in the strategies to achieve them.

When I started investing in real estate my initial goal was to insulate myself from unexpected job loss. During the last economic downturn, I was working in corporate marketing at an automotive manufacturer, and I watched a number of my colleagues lose their jobs. It changed my views on job security.

2. How do the projected returns compare with the actual risks?

Investing inherently involves risk, and assessing the potential returns against these risks is paramount. For example, a ground-up construction project inherently has more risks than an existing, cash-flowing multifamily property. Therefore, you would expect to see higher projected returns for the ground-up project than the existing multifamily.

A prudent investor must delve into the underlying factors driving projections. Who will be managing the investment? How does this investment align with their experience and track record? What external factors could impact the investment's performance? By critically evaluating the risk-return profile, you can make informed decisions that align with your risk appetite.

3. How can I lose money on this investment (and what can be done to mitigate that loss)?

While everyone dreams of soaring profits, it's equally crucial to consider the flip side: potential losses. Understanding the various ways an investment could go sour is essential for risk management. Whether it's market volatility, regulatory changes, or operational challenges, identifying the potential pitfalls allows you to proactively devise mitigation strategies.

When investing passively, you will want to know the operator is proactively identifying and defending against these threats. It’s impossible to plan for every single circumstance, but they should be equipped to navigate challenges that arise.

4. Will this investment get me closer to my end goal, even if I don't receive the projected returns?

Investing is not just about maximizing returns; it's about achieving your broader financial objectives. If you want to invest in a real estate deal so you have more financial and time freedom, you will ultimately have to make investments. Even if the anticipated returns fall short, if the experience and relationships build your confidence and get you closer to your long-term objectives, it may still be a valuable endeavor. Will you gain experience and contacts that will help you in the future? Will you learn more about your risk profile and sharpen your approach?

Asking better questions allows you to realize your true intentions with investing. Additionally, understanding your desired outcomes and developing a holistic perspective enables you to prioritize investments that serve your overarching financial strategy, rather than chasing short-term gains at the expense of long-term stability.

Conclusion

Whether you're investing in a real estate deal, stocks, personal growth, or other areas, these guiding questions can steer you toward sound decisions. Each individual's circumstances, preferences, and goals will shape their unique investing philosophy. As you continually progress and change, so should your investing criteria.

While quantitative metrics and market analysis undoubtedly play a crucial role, it's the qualitative aspects — such as clarity of purpose and risk awareness — that ultimately determine success. By asking the right questions and staying true to your investing principles, you can navigate the complex landscape of financial markets with confidence and conviction. Remember, the journey to wealth creation is not about sprinting to the finish line but rather about staying the course and making informed decisions that move you toward the future you envision.

About the Author:

John Casmon has helped families invest passively in over $100 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Multifamily Insights. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com

Disclaimer:

The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.