Transcription
Hey there, Justin here. Looking forward to spending some time with you today.
Last week I talked about invisible deals, the private opportunities that never make it to public platforms that get filled before most investors ever hear about them. But I also said something important. Just because a deal is private doesn't mean it's a good deal.
So this week, I want to give you the framework that I use to evaluate any deal that crosses my desk. These are the five filters that help me say no to most things and yes to the right ones.
Filter one is lifestyle first. So the first question I ask, does this investment require my time? My goal is not to buy a job. It's not to buy a business that dominates my time and requires too much of me. I want investments that aren't going to require my work and they aren't going to put me on the front lines of operations. So lifestyle first means I do the work once. I do good due diligence to make sure it's something that I want to do, but it doesn't take any extra work after that. So it's one-time work, then it returns from there. If a passive investment is going to demand 10 hours a week of my time and attention, then that's not really passive. That's a part-time job with a fancy rapper.
Filter number two is reduce the risk. So the second question I ask is how is my downside risk protected? There are a lot of ways to do this. Collateral being one of them, put option protections, personal guarantees from the sponsor, structures where the value of the collateral is greater than what you actually invested in. I'm not looking for the deal with the highest potential upside. I'm looking for deals where my downside is protected, where even if everything goes sideways, I'm not going to get wiped out. The wealthiest investors that I know think about risk first and return second. That's the opposite of how retail investors think.
Filter number three is to get the principle back quickly. So, the third question I ask is, how fast can I get my original investment back? The faster you get your principal back, the faster the deal is derisked. If I can get my money back in one to three years, I can recycle that capital into another deal. This is what I call velocity of money. I want my money working hard for me as hard as it can at all times as many times as possible. So, here's the beautiful thing about many syndicated deals and funds. When you get your principal back through a refinance or a quick flip or a value ad that performed, you don't lose your equity. You still have the equity until the deal goes full cycle. So, you get that money back. You put it in another deal while maintaining the equity in the first deal. And you do that five times in a few years, and you've got five different deals with the same original capital and five different equity positions. And it's all house money at that point.
Filter number four, create cash flow immediately. So the fourth question I ask is how quickly will this deal start paying me? The faster that you get cash flow, the more derisk the deal becomes. Every month I receive a distribution, that deal is less risky because I'm taking chips off the table. Monthly cash flow is ideal. Quarterly cash flow is great. But if a deal isn't going to pay me anything for 3 to 5 years while I wait for the upside, that's a different risk profile entirely. Cash flow also tells me that the business is healthy. If a deal can produce consistent monthly or quarterly returns, it means it was purchased well, it's operated well, and it's not just a hope and pray situation.
Filter number five is to find an income amplifier. So the fifth question I ask is how can I make this deal better? One of the advantages of being part of a community is the ability to negotiate preferred terms. So think lower minimums, reduce fees, enhanced preferred returns, better splits with the sponsor. When you can aggregate investment dollars across a group, you have negotiating leverage that an individual investor just doesn't have. And that's an income amplifier. you're getting a better deal than what's offered to the general public. And it's not just about finding good deals, it's about making good deals better.
Let's talk about the filter that most people can't afford. So, this last thing that I want to mention before we wrap up here today is due diligence. We spend over $300,000 a year just on vetting deals. Internal teams, external teams, analysts, legal review, background checks, and we say no to most things, most deals, most investment opportunities. That's not a budget that most individual investors can replicate. But it's one of the reasons our track record has been so strong for so long, even when a lot of other syndicators and groups have gotten into trouble over the last few years. We have very strict investment criteria. And while we may have missed out on some of the early deals that other people thought were great, we didn't get stuck in the bad deals when the market turned. To me, that's more important than chasing the highest return.
Next week, we're going to talk about the investment that outperforms everything else. These five filters have helped me avoid 90% of the bad deals that I've seen over the years. But there's one investment that I haven't talked about yet. One that I believe outperforms everything else over the long run. And it's not a deal. It's not even an asset class. And most people completely overlook it. I'm going to share it with you next week.
Oh, and one quick question for you before we wrap up. Of the five filters, lifestyle first, reduce the risk, get principal back quickly, create cash flow immediately, and find an income amplifier, which one do you think you've been missing in your own investing? Comment below and let me know. I'm always curious to see what resonates. We'll catch you next week.