Reality Sets In

I was hanging out with a friend over the weekend and he wanted my opinion on a business in which he was looking to invest.  It was a business he didn’t have any experience in, but he did spend the last two months doing some do diligence, finding the right partner, and getting some capital to invest in this business.  He asked my opinion and very clearly I said, “I don’t think it’s a good investment and I think you should pass because I think there’s a lot of risk over the reward.”

Typically theory is emotional and in theory you go down this path and think, ‘Wow, this makes a lot of sense; I can make a lot of money, there’s limited risk…’  Theory goes one way, but then reality goes another way.  Reality has speed bumps, it has curves, it has roadblocks.  Reality can be overcome with experience.  That being said, in theory things will always go differently than in reality.

This is very common in real estate investing.  I know a lot of investors that jump right in.  They pick up their first project,  start renovating, another deal comes on the market, they do the same, and another deal becomes active and they do the same.  All of a sudden, they have three projects all at once and they never cycle all the way through one complete deal.  The first one goes a little sideways, the second one goes a little sideways, and the third one goes a little sideways.  They’re all minor speed bumps, but because you have three headaches now, all of a sudden your asset(s) can turn into steep liabilities very quickly.  

In theory everything always works.  You map how it will work in your head and it’s great.  In reality it’s always different.  What I recommend to real estate investors and new business owners alike is to start small.  Start with something that has low risk and see through the entire transaction.  You will learn from it, you can modify, and if something goes wrong, it’s not a disaster.  You fix it and move on.  The goal is to turn theory into reality by fully understanding how to navigate a real estate transaction or a business so whenever something gets sidetracked, you can put it right back on track.