When investing in syndication, funds, or general investing, it’s crucial to avoid common pitfalls. Tune in to this episode as Chris Seveney lists down the common mistakes that can trip up even savvy investors. Proper due diligence is key, so he guides you through understanding expected returns, risks, liquidity, and the importance of research. He also emphasizes the significance of portfolio diversification across different asset classes and opportunities. Join Chris as he unpacks the risks involved in investing and caution against relying solely on promises or guarantees of returns. Remember, doing your own research is paramount, so don’t blindly rely on recommendations. Tune in for this essential episode to navigate the world of investing with confidence and avoid the pitfalls that could derail your financial success.

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Listen to the podcast here

 

FILLTTHY Mistakes: Top 5 Pitfalls To Avoid When Investing In A Fund Or Syndication

I have an episode that I’ve been wanting to record for a pretty good time now and just really want to take the time to put what I wanted to say and get out there. I’m titling this one Filthy Mistakes Top Five Pitfalls to avoid when investing in syndication, investing in a fund or just investing in general because right now, we’re starting to see cracks in different markets. We’re starting to see changes in the overall economic environment and people think having short-term memory over the last several years was so good, especially in real estate investing. 

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Due Diligence

Now going to a time where it’s not just based on appreciation and even mismanagement, in that sense. Now, it’s going to focus really on the manager, their expertise, and their experience, and I want to talk about that. I want to start with what I would say is number five, which is proper due diligence and this is due diligence on the asset on the sponsor. Right now, I’m talking more about real estate investing, but this can again be done for anything, whether it’s stocks or crypto, whatever the case may be, just proper due diligence. 

One of the first things that I see is a lack of education from an investor. Investors frequently jump into a complex investment, whether it’s mortgage notes or a multifamily deal. Other types of syndication, self-storage, and funds that do everything. They mix different aspects of oil and gas, commercial real estate, and crypto. Whatever it is, what I want people to understand is you need to have some knowledge of that asset class. Knowledge can be found online, by talking to people, and in varying arrays and methods. 

One of the key attributes that you need to understand when you’re getting that education is expected returns, the risks, and the liquidity. As we talk further on this episode, we’ll see that there are investment options out there that when they’re offering twice an expected return than the industry norm, should set off little red flags in someone’s head of how can they do this and not somebody else? The answer is typically it’s not a greedy sponsor just trying to keep it all and we’ll talk about that later. The rule of thumb that I used as also a passive investor, I think goes very well for people, is if you can’t explain the investment and don’t invest in it. 

That’s what I go for, and that’s why I choose certain things like cryptocurrency, oil and gas, and other types of investment opportunities. I know people have made a lot of money in them, but I can’t explain that investment. I don’t understand it. I will not invest in it. The other component that falls into the due diligence component is people who just listen to their friends without doing their own research. I see many investors follow recommendations from friends and colleagues, and they don’t conduct their own due diligence. They’re just, “This person told me.” 

If people remember, I can’t think of the woman’s name, but she created that device that could test your blood and supposedly tell you everything that’s wrong with you. There was a movie on it and she was the one who looked dressed like Steve Jobs. I apologize. I just can’t think of her name or the product that she had. Essentially, she was getting big-time investors to support the company because it was just word of mouth. She has this person on her board. They have this person who said yes. 

Those examples where could be pyramid schemes and bad deals in which people relied on others’ advice. There’s one right now where there is a sponsor out of, I think, the Atlanta area, again, we’ll talk about that a little later, was promising these excessive returns, and it was basically getting investment people to raise money for them, and it was really a pyramid scheme at the end of the day. Regarding due diligence, always research the sponsor, the market, and the asset before making a financial decision and talk to others about it, too, who may have more knowledge in that space. 

Diversification

Knowledge is power. Let’s go to number four. This is diversification. Everybody’s always told, don’t put your eggs in one basket. Many of us work a W-2 and have a 401(k). Now is your 401(k) and something that is diverse or you put everything in one stock or one type of asset class like tech stocks or real estate investment trusts. Where does that go? You’re always taught to diversify and many investors sometimes focus too much on one asset class or a specific asset. There are so many alternatives out there, like real estate. We do mortgage notes and private equity. 

There’s diversification not only from the stock market because I believe in order to build true wealth, you should also invest outside of the stock market, but also within no specific asset classes. Diversification isn’t just about balancing stocks and bonds but spreading that risk across different asset classes. When you do that, the rule of thumb is to avoid putting 10% of your portfolio into any single investment or asset. What I see happen a lot is investors who are accredited and there are phrases out there we use acronyms like HENRY, High Earning, Not Rich Yet. I know a lot of people like this who make $150,000, $200,000, $250,000 a year.

Diversification isn't just about balancing stocks and bonds but spreading that risk across different asset classes. Share on X

They may have a hundred thousand in the bank because they have money spread throughout and other things. Maybe that’s just they live that lifestyle and they got a hundred grand. They’ll find a deal or syndication or fund that minimum investments, 50 or a hundred thousand. They put everything there. Reading stories about this company that was out of Atlanta, that again was promising 40% returns, I see online on Reddit and some of these other posts where people getting close to retirement put their entire retirement into this one investment. 

Please, people, do not put your entire savings or investment on one horse. Now again, the rule of thumb, is no more than 10% of your portfolio should be in a single investment. Just because you’re an accredited investor doesn’t mean that you should go drop $50,000 in investment. That’s all you have. We run a regulation A plus offering that has a $5,000 minimum. There are plenty of funds like ours out there that you could spread across ten different opportunities, and deals do go bad. People are now realizing that they did not realize that five years ago. 

It takes a lot longer if you lose $20,000 in a deal and you had $50,000 to get to $30,000. To get back to $50,000, you’re pushing a rock uphill. Remember that investing is a long-term play as part of that. That diversification I think is so critical and important to understand that you again want to broaden your range. The other thing I’ll just mention briefly is I know some people also who will diversify by investing in 3 or 4 different opportunities, but they’re all the same. 

I’m going to invest in three multifamily deals in this one location or I’m going to invest in only self-storage or I’m only going to invest in these three different crypto.  I would not spread everything across one asset class, which is like investing in just different airline stocks. That’s not something that I would recommend. Now, I do have to say, give the caveat, I’m not a financial advisor. I’m not offering financial advice. Everything here is for educational content and purposes and to tell you what I see in things that I do or would do with my portfolio. 

Understanding Risk

Let’s go to number three, understanding risk. This one, I was curious where to put this one. Do I put it at 1, 2, or 3? Where does this one fall? When people need to understand risk, first is, nothing is guaranteed, nothing is promised. Promises and guarantees do not belong in investing, but going to a casino and playing blackjack and having the dealer tell you that you’re guaranteed or promise that you’re not going to lose X amount of dollars or you’re going to not lose anything. It does not happen. 

Now, investing is not gambling. For some people, they invest in the game it is. Please, please, please understand this. No matter what a salesperson, a sponsor or anybody tells you. They throw out the words guarantee and promise, which should raise huge red flags. A perfect example is this investor who was selling mortgage notes on land. They were written at 0% down, 0% interest rate. He was trying to sell them. He’s been trying to sell them for about five years now, like $0.50 or $0.60 and he was guaranteeing an 18% return to the investor.

What he was saying is if this fails, I will buy it back. I called this individual out on Facebook where it was. He got extremely upset with me and told me I should stay out of his business. I told him, “If you’re going to step foot in my Facebook group and start guaranteeing returns, I am going to put my foot down because there is no such thing. Unless you put that money that that person invested or that person paid you back into an escrow account that you can’t touch, that money sits there and gets withdrawn as they receive their payments if you’re guaranteeing that return. That is the only way you can guarantee that.” 

He’s like, “I’m not going to do that.” I’m like, “Exactly.” He said, “I’ll buy it back.” I’m like, “Who’s to say you’re going to have the money?” Do you know how many times I’ve heard somebody promise or guarantee something? We see people all the time online. I guarantee I’ll pay you back if you give me a $50,000 loan because I’m going to fix and flip this property and make $300,000. I’ll probably see one of those posts every single day. Now, one thing to also understand is sponsors are the people raising money for them. They can be persuasive. 

Be very persuasive and make it sound like it’s not really risky. There’s not a lot that could happen. I’ve been doing this for five years, but whatever the case may be. Always consider the worst-case scenario and assess the risk that’s involved. The other component of the risk is the return. We have people look at our fund and see that we provide between 8% and 11%. That’s not enough. I can get 18% on this multifamily deal. I’m like you can because they are 70% leveraged on that asset. They may have a variable rate or whatever type of loan they have. 

 

It’s a value add that they may have to increase rents and renovate the property, which I spent twenty years in construction. Renovation is risky. Raising rents is risky. I was talking to somebody the other day about investing in these larger deals. We used to use John Burns Real Estate, who would do market studies for us, and they cost $10,000 or $20,000. They would take a look at that MSA and say, “You have 200 units. Here’s the average rent for this type of unit, or if you upgrade it from a C to a B, here’s the absorption rate. Here’s what it looks like. Here’s how many new products are coming on the market.” 

Now, full-blown study is almost like a business plan would this or would this not work and will you get the numbers that you think you’re going to get? I looked at many multifamily deals, especially the large ones, and I’ve never seen anybody offer a market study. On a $50 million deal that they’re raising money on and they’re getting a $35 million loan and no market study. Now you look at what’s happening today in this space and some people say that you couldn’t see it coming, but I think common sense would tell you if the government was printing, I don’t know, $5 trillion, $6 trillion, $7 trillion. 

You’d see a pop and then you spike and then you look at any type of spike we have on anything, and it comes back down. That’s what we’re somewhat seeing now. Now, going back to my analysis, you could get 18% or lose everything or. I’m not saying this about my fund, but I’m just saying this as something else. Any other offering between 7% and 10% doesn’t have leverage chances of losing everything. I think are much lower. Now, would you rather target 7% to 10% per year or 18% or 0? I can’t answer that question for you. That’s a question you need to answer. For some people, it’s like anything. It’s a balanced portfolio. 

I have some high-risk investments and I have some other types of investments. It’s an equity play versus an income play. Nothing wrong with it. I have investments that I consider higher risk as part of my personal portfolio, but I understand it. What I typically see happen to a lot of people is that they don’t understand the risk of losing it all. They understand how high risk that was because they were guaranteed a promise or they were told, “We do this all the time.” When we talk about what we’ve gone through so far, proper due diligence, that’s on you. 

FOMO

Diversification is on you. Understanding risk, and this is also on you, but there’s an education component as part of each one of those. How to diversify, how to do proper due diligence, and how to understand the risk. Number two, FOMO, Fear Of Missing Out, takes no experience. None at all. Over the last several years, you saw it with GameStop. You saw it with was it Dogecoin? I think you see a little bit now with Nvidia. I’m using stocks example, but you saw it with short-term rentals. You saw it with self-storage. You saw it with multifamily. We’ve seen it in mortgage notes.

Now, are the changing trends or chasing trends that people get into? Many times, by the time you’re trying to get into it, you’re doing it at the peak. FOMO can cause investors to jump into an investment due to fear, and they’re going to miss out on that opportunity because the good times may have already passed, but you don’t know it yet. You’re also taking on considerable risk. I view it more as an emotional decision that can lead to buying investments at inflated prices or during bubbles. 

The specific areas of the market that just popped in people’s so much FOMO that people have short-term rentals looking at what’s going on in Florida and Texas right now with pricing. Austin is an example, I believe, where there was such an influx and now insurance taxes and other costs have increased and demand isn’t there. People are walking away from properties or have bought a property for $1.2 million, which is now worth $900,000. It happens. People just don’t realize it because it hasn’t happened in 10-plus years. For me, I try and stay away from FOMO. It’s something that everybody gets sucked into.

You have to resist. The way I look at things, it’s a better approach to investing with a long-term strategy. Avoid emotional triggers and stay focused on your investments rather than just chasing the trends because there’s always going to be a trend. Whatever happened to NFTs? Those come and gone pretty quickly, I would have to say, as an example. I know people who are trying to create them or buying them now. Pretty worthless. When I was a kid, I age myself, baseball cards. I have always wanted to buy a new set and a new box, and I was a big baseball fan and baseball card collector. I still have a good collection.

FILLTTHY

Everybody got into them, and they started printing so many. What happens now is that they get devalued like anything. The more of something there is and demand goes down, the less valuable it is. Don’t follow the FOMO. Number one, I’d say, is an acronym that honestly popped into my head the one night when I was half asleep, I call it being filthy.

Falling in love leads to terrible high-risk yields. It’s an emotional trap. Investors will fall in love with the sticker somebody offers.  18%, 40% returns, 25% returns, historical IRR of 35%. Now, when people promise these high returns, you really have to assess the risks that are involved. The SEC, Security Exchange Commission, is littered with warnings about high-risk returns and high-risk yields. 

When people promise these high returns, you really have to assess the risks that are involved. Share on X

Understanding that it’s not normal. Historical yields on the stock market in real estate, but typically seven to 10%. Yes, there are years when it’s higher. Yes, there are years when it’s lower. Yes, there are opportunities where you can make 20% or invest in Nvidia or some of these other companies. Those are equity plays where you might get there. When I see income plays like this one in Atlanta, which was offering 40% returns. When I heard that, I was like, it’s impossible. There’s name a company that historically can say, “Yeah, we’re going to give you 40% returns every year.”

There are two investors and still have profit. Do it where they could continue those returns. There are years companies, of course, make 40% but consistently. If everyone else in the space is offering 7% or 10%, how does someone do 40%? No. Even credit card companies. Look at what they do. Now they charge 18%, 20% on unsecured loans. They have overhead and they’re not making 40% returns. There’s another syndicator that was offering 15% to 20% on notes when, again, the average was about half that people put some caution to the wind on some of the forms.

I don’t think people understood the full scope of the risks. It reminds me of when I was younger, when you had your first no crush on somebody. Now, basically, it’s like you’re falling in love with them and just becoming star-studded in regards to how awesome it is. Understanding some of the things that individual could also work on or some of their faults. We all have faults.

GREED

Same thing as investments. You can’t just be star-studded based off of that aspect and fall in love. You need to understand everything when you’re relying on emotions and trusting these high promises, it can lead to terrible outcomes as high majority of those deals often underperform or go completely.  Those are my top five. As a little bonus, I was going to use one little more analogy that a lot of this is based on human nature, which is honestly it’s GREED. It’s really what it boils down to. When we look at it to anyone watching, you can see that what just popped up next to me is that I use GREED as an acronym.

 

That’s Getting Returns Eagerly and Expecting Big Dollar. The G, Getting high returns. Investors are seeking above-industry standards on their investments. Be careful in getting those high returns. Yes, there are ways you can find companies that you believe have some type of advantage, but understand what that advantage is that they have. Whatever you do, do not fall for the rush into the deal like, “You have to invest by this day. You have to do this.” 

Now we have in our offering at the end of every month. We notify people. You invest by the end of the month. It starts accruing that following month, but it’s not pressure. It’s a notification. When you go to these highly intense sales pitches, they tell you a lot of high-level information and then basically have the people in the back of the room that are salespeople with the credit card machines that, “You can pay with your credit card today.” That typically needs some more and more and more.

Take your time to understand the deal. For example, with our fund, a regulation a plus offering the average investor journey is about 90 days. By the time we connect with them, we talk to them. We provide them with education. We’re not pushing them. Say, “You got to invest.” We’re educating them. It takes approximately 90 days, which, on average, it’s going to be between 3 to 6 months to people should do to evaluate these types of deals.

The first E is Excessive risk-taking. I think we already talked about this, where you’re pushing for the higher returns and you’re taking on unnecessary or poorly calculated risk. If you might not even understand the risk or go back to that filthy, you’re falling in love with that number that’s thrown at you. You’re just like, “I can get this. I realized my $100,000 is going to get me $40,000 per year and then I could use that for college. I can use that.” What happens if your $100,000 went to zero? How does that impact you? The second E ties into that which is expecting too much. If you have those unreal expectations based on hype or unproven projections. It can lead to challenges. 

 

Last is Dismissing due diligence. Ignoring the key research is the risk assessment because of your focus on those promised returns or the sales picture getting from them, such as, “This is what we do. We’ve got this many investors. We’ve made this much money.” With that one that was offering 40% right now, they’re under investigation for an alleged Ponzi scheme and people got in earlier like, “I was getting paid and I know this person and that person and this person,” but at no point in time did anyone ever see any financials? 

I wonder if they ever asked for any financials. It’s important as part of due diligence to say, “How do you report to investors? How do you provide financials? Are they audited? Are they not audited? Who does them? Where can I see them? Can I see them? Do I have access to them?” If you’re investing considerable money in a company, once you like the opportunity, be able to look at them or understand them a little better.

At the end of the day, there’s lots of information out there, but not every deal goes bad. Most of them actually probably end up going well. I want to share some of the top pitfalls to avoid when investing in a fund or syndication. For me, the last word I’ll leave with people is to be patient. There’s no such thing as a dumb question. If you don’t understand the investment, continue to ask the question and have them explain it to you like it’s a third or fifth-grader.

It’s okay. Nothing wrong with that. It’s nothing to be embarrassed about. I was trying to understand a cryptocurrency investment and I basically told them to explain this to me like I’m a second grader because I just don’t understand it. Now, I can talk real estate, as you mostly all know, all day long. When it comes to things outside of my specialty, I don’t study it. I don’t put a lot of thought process into it. I’m really not understanding of it. I thank you for listening to this episode. If you have questions, if you have comments, please feel free to reach out. Thank you all. Take care. Make sure to leave us a review. Thank you all.

 

Important Links

• https://www.LinkedIn.com/in/christopherseveney
• https://Go.7eInvestments.com/DueDiligenceWebinar