My mentor once taught me to “never work without a safety net.” This is the same lesson that can be learned by observing the world's largest banks and investors.
Banks are very good at covering their downside. They do a great job at mitigating any loss that might come their way by minimizing their risk and letting the upside take care of itself. In business, nothing is guaranteed; however, what banks do is try to protect themselves against loss.
Over the next several blog posts, I'm going to reveal lesson's learned from banks, and how you can cover your downside on real estate deals. Begin thinking with a banker's mentality and you'll begin to see things through a different lens. Try to figure out how you can be on the receiving side of inflation, appreciation, and opportunity costs – all while protecting your downside.
The Importance of Collateral
The most obvious way banks look to protect their investment is by asking for some type of collateral. For example, say I were to come to you with a gold brick, a Lamborghini, or something else of great value and asked you for a loan at 10% of the collateral’s value. Would it be a good deal? Would you be okay giving me a loan for $10,000 if the offered collateral was worth $100,000? You can't lose, right?
This is exactly how banks look at lending opportunities. They think, "If everything goes bad and the borrower stops paying, can we recoup our investment and maybe even make more?"
Similarly, as investors, we need to always be thinking of how we can cover the downside. Are there ways to make your collateral worth more once you've loaned against it? You must ask yourself, “How can I continue to increase my upside while also making the downside so attractive that I make money in either case?”
For more information about how you can cover your risk or the investing process as a whole, call our team of real estate investment experts at The Legacy Group today. With more than 100 years of collective experience, we have what it takes to help you find a smart investment solution.