Become the Expert First
Every deal arrives with a good story. Who in the room actually knows the business?
"Become an expert in the asset class before you invest, because every deal is sold as a good deal."
Meet Nicole. She built and sold a software company, then went looking for responsible places to invest the money and landed on real estate, an asset class he had no experience in.
After we sold our software company, we went looking for places to invest the money responsibly. One asset class that had always seemed attractive to us was real estate. It felt like a no-brainer.
What we couldn't see at the time was our ego. When you build a company in one industry and sell it for a lot of money, you start to believe you're not just an expert in your industry. You're an expert in business, maybe in investing too. We figured anything we put money into would work out the way the company had.
We started investing in real estate syndications (private deals where a sponsor pools money from investors to buy properties). A deal would come along, we'd flip through the prospectus, nod like we understood it, and wire the money. We have the Midas touch, I told myself. Over three years we did 21 deals, anywhere from $11,000 to $250,000 each. $1.5 million in all.
Here's what I understand now. In my own industry, I can pick apart an investment in minutes. I know which market assumptions are made up, which timelines are fantasy, which projections are fiction, because I'd put in the time and become an expert. None of that came with me into real estate. I read the slides like they were facts. With no experience in the asset class, I couldn't tell a good deal from a bad one. And every deal was sold to us as a good deal.
Three years later, the returns haven't come close to what the investments promised us. We would have made more money putting it all in a high-yield savings account.
The mistake was never real estate. It was believing that being an expert in one industry may qualify me to judge investments in another.
So if you want to invest in an asset class like real estate, go for it. Just become an expert in it first, the kind who can evaluate a deal yourself instead of taking the sponsor's word for it. If you're not willing to do that, stay out. Because until you're the expert, you can't tell the good deals from the bad ones, and in our experience, every deal is sold as a good deal.
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