When it comes to investments, one burning question remains: How can you ensure the safety of your hard-earned money?
Brace yourself for an eye-opening journey in this episode as Chris Miles, a seasoned investment expert, shares his invaluable insights on risk assessment. He shares the essential questions he poses to determine the safety of investments, empowering you to make informed decisions and protect your financial well-being. With decades of experience, Chris Miles unveils strategies to minimize risks and maximize returns. Don’t let uncertainty dictate your financial future—tune in now and unlock the keys to secure investments that stand the test of time. Get ready to embark on a transformative episode that will shape your investment philosophy and set you on the path to financial freedom.
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How Can I Know If An Investment Is Safe?
Welcome to show that’s for you, those that work so freaking hard for your money and you’re ready for your money to start working harder for you right now. You want that freedom and cashflow today, not 30 or 40 years from now but right now so that you can live that life that you love with those that you love. Most importantly, it’s not about getting rich, is it? It’s about living a rich life because as you are blessed financially, you have a greater capacity to bless the lives of those around you.
Thank you for allowing me to be able to create a ripple effect in your life, in whatever way that might be. Thank you for allowing me to share with you and thank you for reading. You’ve been bingeing and sharing with others. Even some of you, I know our clients have been sharing it with some of your friends saying, “This is what’s changing my life.”
Thank you so much for doing that because this is the ripple effect that I’ve always envisioned and you guys are making it not only a reality but beyond what I could have imagined. You are helping a lot of people. You are liberating people because of the choices you make. If you haven’t done so already, check out MoneyRipples.com. Go use that passive income calculator to see how much passive income you could create in the next year. Not in 2 years or 10 years, the next year to see what you can do. As I showed you before in the show, it’s pretty dang awesome. If you haven’t used it already, go try that out today.
I want to talk about a question that’s coming up a lot even among our clients because it’s no secret that there’s a lot of uncertainty in the marketplace. People don’t know, “Should I put my money in the stock market or not? It doesn’t seem right.” From 2022 leading into 2023, there’s been some turbulence for the real estate game as well.
The Real Question: How Can I Know If An Investment Is Safe?
The real question that comes down to this is, “How can I know an investment that’s safe? How do I know the investment I go into will make me money and that I won’t lose money?” That’s a great question to ask and here’s my answer. You don’t know, 100%, at least. You can do what you can to minimize risk but it’s hard to know for almost any investment and this is the case, even for me.
You really don't know 100% if an investment is safe. You can definitely minimize risk, but it's really hard to know for sure. Click To TweetI have rentals, for example. Rentals would be one of the lowest risk things I could be doing because at least you know the value of those rentals will not go to zero but is it possible that something could go wrong? Could there be bad tenants? Could there be other maintenance issues you didn’t expect they would cause more costs to go into it and lower your returns? Yes. Will you ever go to zero? It’s pretty dang hard to do, especially if you have insurance and other things in place.
When it comes to putting your money with other people, you’re right. This is where you’re one degree separated from that investment and even more so, if you go into a fund because funds can be even two or multiple degrees of separation depending on the type of fund that you’re going into. Real estate funds, usually, it’s a two-degree type of separation. There’s somebody that you’re investing with and then they’re investing with other people.
If it’s a syndication where they go and invest one deal, at least, you’re only one degree away. That person that you put your money with is the one that’s operating, their company or their team will go and operate. They are the operators that are doing the management of the property. Whether it’s an apartment building, self-storage units or whatever it might be, they’re the ones doing the work but you’re putting your money with them and then they do the work.
There’s still that degree of separation that does create a little extra risk but if you go into a fund where someone says, “I’ll take all your money. I’m capital raising. I’m raising money and then I go and I find the deals. I invest in those deals,” you’re trusting them to trust the other guys or the other people that they’re investing with. There’s an element of risk.
I want to share with you what I’ve shared with many of my clients and even in our Wealth Accelerator Program. These are some of the questions that I’ve used. It’s more of a mental thing but I’ve put it into a spreadsheet. I’m going to share what kind of questions I look at. How do I analyze a deal to lower that risk? It’s because I know even the best operators, even the real estate game, those that have been doing this for decades, still things could go wrong.
It doesn’t mean you’ll lose everything but it does mean things go wrong. When people ask me, “What about the stock market, Chris? At least, I won’t lose everything.” The likelihood is you won’t lose everything in the stock market either. That’s another advantage. The stock market’s liquid. You could probably get in and out, you could sell out of it, even though most people don’t. Even though they should sometimes, they won’t but at least there’s not always that kind of risk there. You could get out. The problem is you have zero control.
Let me share with you exactly what I use. I have my little spreadsheet. It’s pretty dang simple. The thing is I even got to add up a score. You can put scores in your numbers here. I could put an 8 and it tallies up to be an 8 at the bottom. I can do stuff like that. Let me talk about the questions so you can get an idea of what I look for. If I got clients reading this, it might be good for them to review it as well. This is weighted based on the most important questions.
For the most part, these questions are pretty much in order. Number one, this is the first question I ask of myself, not of the investment but of me as an investor. To what extent am I motivated by passion or interest rather than just money? In other words, how much of this is motivating me based on rates of return versus me liking the investment and understanding the investment? Here’s what happens. Psychologically, they’ve proven this. The higher the promised rate of return on an investment, the less due diligence somebody does on that deal.
I’ve had so many people say, “Chris, there’s a straight rate fund that’s paying 10% a month or 3% a week and all this kind of stuff. It’s amazing. It’s not even that much money out of pocket.” You are thinking of how much cashflow you make. “If I keep doing this for X number of years, I’ll be financially free.” Here’s the problem. I’ll have to ask. Beyond the money, which sounds awesome, why would you invest in it? “It’s cool.”
The Value Creation Perspective
Is it cool because you’re getting paid a lot or at least, you think you’re getting paid a lot or is it cool because there’s something else behind this investment that you think is amazing? People might say, “Chris, you just invest for money, right?” “No.” I like when I get paid money but that’s not my primary reason. I like to do investments that I believe in, not only from a financial perspective but even from a value-creation perspective.
Here’s the key to any investment, dollars follow value. It has to have some type of value creation. This is like in 2006. I remember when I was starting to learn this stuff and one of my friends said, “There’s this company called 12DailyPro. You should invest in it because every 12 days what happens is that they pay you 24%. If you do the Rule of 72, it means that every 36 days, if you kept reinvesting it, you would double your money. It’s even better than 10% a month or 3% a week which some people have talked about.”
It’s amazing. I asked the guy, “How are they doing that?” He said, “Honestly, I don’t know. There are some of our friends in this but if some of our friends that talk about following principles would hear about this, they would be very angry but it’s $5,000 that I threw in here. If I lose it, lose it. It’s gambling money. I figure once I make the $5,000 back, I’ll pull my $5,000 and let the rest just go.”
I was tempted to do it myself because I thought, “That’s a lot of money,” especially coming financial advisor. I realized the S&P 500 doesn’t even make 8% a year. I’m thinking, “It’s good.” I was hesitant and I was still researching it. During that period, it got shut down. Why? It was a Ponzi scheme. Often, when I see people chasing these rates of return, I’ve seen other people like, “I get paid 25% a year.”
I’m not saying there aren’t investments that are good investments making 25% to 30%-plus a year. I’ve got an investment, a partnership that I’m in that the cash and cash returns are about 40% to 45% a year. It’s amazing. I love it but the thing is, it’s got to make sense in the context. My big thing in that first question is questioning me, “Am I being swayed by returns?” I remember I asked one guy this. I said, “Besides money, why would you do it?” “It gives me tax advantages.” “That’s still a money answer. Give me something else.” He didn’t have it.
This is my point. It’s questioning your motives. Number two, we’ve already flirted with. It is how well you understand the investment, how it provides value to others and how to make it successful. Notice I put extra layers in this. One, you got to understand how it works or what the investment is. If you can’t understand or simply explain it to your spouse, it’s probably not the right investment for you. At least, not at this time.
Can you figure out how it provides value to others? If you don’t know, that’s a big issue. It’s like my friend. He’s like, “I don’t know how they even make money.” That should be a warning sign. I had somebody tell me, “It’s 3% a week. It’s amazing, this company.” I did an episode on it. “It’s incredible. You make 3% a week. You’ll make so much money in five years. You’ll be financially free.” I said, “Yes, but what is it invested in?” “It’s dealing with crypto exchanges.” “It’s even worse.”
It’s something they can’t control either. They’re somehow gambling it and you think that somehow they’re experienced. “Let me look up those people,” which I’ll get into that one. That’s another question down below. It’s those kinds of things. You got to understand how it works. How does it create value? When I buy a rental property, I know I’m providing a house. I’m providing a home for a family. That is creating value. I’m not being a slum lord like, “I’m just providing a place with three walls.” There’s not even a fourth wall. It fell. I’m not doing that.
I’m providing a service. Think about the opportunity. Everybody’s complaining that interest rates are starting to go back up the mortgage rates again. What’s also happening is that prices are still going up because there’s a supply shortage because nobody wants to sell their home. Prices keep going up. The appraisal keeps going up, which creates its bubble if we’re not careful.
However, those prices that keep getting driven up create an opportunity to rent a house. To be able to say, “I can create more cashflow because it’s priced in the amount of the market. They’re still willing to pay at least a decent amount for rent. They don’t have to worry about this.” There’s an opportunity there. Also, I know how to make it successful. If you understand how it works, you’ll understand, “This is why it makes money. Here’s how they’re successful.”
Notice, I put here like I’m doing in number one, “Explain how you know.” In the action, there are comment sections right there. This is something that I have people do. “Put in the comments. Tell us.” The action would be, “Are there additional questions you don’t know that you should be doing?” I have everybody rate this from 0 to 10.
Number three, how much control or influence do you have over the outcome of this investment? It’s a very important question. Most investments will not pass these first three questions. If they don’t pass the first 3, they will not likely pass the next 5 that I have on here. In the stock market, how much controller influence do you have? “I could buy or sell. I could pick my funds.” That’s not control.
“Do you have any control over the outcome? Could you make that stock price go up?” No, you can’t. “Can you make it go down?” No, you can’t even do that. You can’t even make it go worse. You can only go in or out but you’re riding waves. There’s no control over that. When people will put their IRAs or 401(k)s in here, they’ll realize, “I’ll put a one here because I can pick my fund but other than that, I have no control.”
Even stock traders will score a little bit higher than that but it’s still very limited because they realize they are riding waves. They’re trying to figure out how to stop losses and things like that to try to minimize their risk but they still have quite a bit of risk. There’s still a lot of market risk there. In real estate, do I have control or influence? It depends. If I buy my properties, even if I have a property manager, I have a lot of control and influence. I have a huge amount of control.
I call this an opportunity questionnaire because even business ideas could be run through this. If you’re looking to invest your time, energy and/or money into a business, this is a great example. Do I have control or influence over this or am I helpless? This is why Warren Buffett buys big percentages of companies because he doesn’t want to be like every other stock trader. He goes in and buys a good share, a big enough interest that gets him a seat on the board of advisors.
In some cases, he’ll buy the majority or all of that company so that he can have more control. He and his team can ensure his investment. That is what a real investor does. That’s how they reduce their risk. That’s why Warren Buffett is not a stock investor. He’s a value investor. He’s a business investor. He buys businesses and not stocks. How much control or influence do you have?
Don’t be a stock investor. Be a value investor. Be a business investor. Click To TweetI’m in an oil and gas investment. Do I have control or influence over this? Not really. I don’t have a lot of control or influence over what’s going on because I’m hands-off. I’m letting them do it. If something were to go wrong, do we have rights? Are there things in here like with any apartment complex or self-storage units? If that person’s not performing, can I do something about it?
Could we foreclose on somebody if they decide to not pay us as our debtors? It depends on what the contract is and how this is set up. Am I an equity partner? Am I a debtor? Do I have a better claim on that money and things like that? Can I force them to pay me back legally because of the contracts and things of that nature? I can then have a little bit more controller influence.
I’ll tell you this question. I had a guy that wanted to invest in an oil investment. This was a very standard working interest like a full-on drilling type of oil investment. It was with one of my friends too. He said, “I’m thinking about doing this.” We got to this question, “What control influence do you have?” He’s like, “I don’t have any.” I said, “Why don’t you ask them if there’s a minimum amount that you can invest that would allow you to be at least on the board of advisors?”
He did. He asked them. It was only $50,000. It’s not a lot of money. They said, “$50,000.” He’s like, “Done. I’ll do it.” After he got more involved and got on the board, he realized these guys aren’t that great of operators. They’re not that good of business owners. He gave them an ultimatum. He said, “I have a lot of money in this deal,” and he even put more in after that. He says, “I realized that you guys are not good. You don’t know how to talk to the oil drillers. The oil drillers don’t know how to talk to you because you’re only financial people. I’m going to step in the middle and become your CEO and you’re going to pay me a salary.”
He negotiated his salary as CEO and helped to try to make sure he could protect the investment that he had with money in there as well. That’s how you get control or influence. You can get pretty creative with this. I’m going to fly through the rest of these. Those are the big three. To what extent does it generate predictable cashflow quickly within 90 days?
The Longer You Have To Wait, The Riskier It Is
There are some investments that you might have to wait 6 months to 1 year to get paid on. That’s not going to score a ten in this. It means you have to wait a little bit longer. The longer I have to wait, the riskier it is. Whenever somebody says, “This is a great real estate investment but you’re going to have to wait five years before you get paid,” too much can go wrong there.
Even a year and a half still makes me a little bit uncomfortable sometimes because I am banking on that happening. I like regular, predictable, stable cashflow. That’s what I like. I like to know that I’m getting paid right off the bat. The sooner the better. I’m sure you probably feel that way too. I can notice I say predictable cashflow quickly. I can know it’s going to be and not just, “Hopefully, they’ll pay me something someday.”
It’s going to be somewhat predictable. Maybe they don’t even have a preferred rate of return like a lower autumn rate of return that they’re going to pay or those kinds of things. How much demand is there for this investment? Think about it in the real estate game. A lot of people got into trouble in the last recession got into trouble, especially some of my friends. Some of them were trying to buy these humongous multimillion-dollar properties.
However, when the credit market froze and the banks didn’t want to lend anymore, guess how many people could get a loan for a $2 million property? Almost none. There’s almost no marketplace for it. Versus a property that was worth $100,000, $200,000 or $300,000. It has a much bigger marketplace, a lot more options and it’s better. When I buy rental properties, people are like, “What about real estate prices?” If I’m buying about the average price of that area or less, I’m not that worried.”
If I was buying way above it, I’m more worried because there’s going to be less demand for that property. That’s one thing I try to do to minimize or at risk is I try to buy properties that are at or a little bit below what the average median home price is for that area. This could be applied to business as well. If you’re looking at business ideas, how much demand is there? If there’s no demand for it, don’t do it. I don’t care if it’s your passion, there’s got to be some demand.
Number six, how well do you know the people and their philosophy that are doing the investing? This one, if you’re investing with other people, it is so important. That one would probably come up in the ranks a little bit more if you’re doing that kind of thing. This is so critical. This is why a lot of people will hire us because they say, “We know that you have people that you’ve trusted, that you’ve done investments with and that maybe you’ve vetted as well.” That eliminates some of the guesswork.
It doesn’t mean it’s guaranteed in any way, shape or form, because still, things can happen even to the best of investors but at least, you know it’s not just some person that’s a great marketer and there’s a lot of people on podcasts, not only me. I’m not the person that does investments. I’m not taking your money or anything like that but there are a lot of people that do podcasts or get interviewed on podcasts willing to take people’s money but they’ve only been in this game for maybe five years at most.
Some of them even a lot less and they’re so good at communicating that it makes it seem like it’s got to be the perfect deal and it’s not. Even people that have been around for the last 10, 15, 20 years that maybe have been through the experiences, that’s good. Another thing too is philosophies. It’s very important to understand philosophies. If I ever hear somebody say, “High risk creates high returns,” I don’t invest with them. I don’t want them taking high risks because I know low risks create high returns, not the other way around.
The whole purpose of this sheet is so you take the lower risk to get the highest returns, not just a return on your money but a return of your money to go with that return. I can’t stress that enough. How easy is it to get out of the investment and get everything back that you invested other than time? If something goes wrong, could you sell it off? Could you get out of it? Are there multiple exit strategies?
I see that sometimes there are certain syndicated deals. It might be an apartment building and they can’t get that refinance. They can’t get that long-term financing that they hoped to get before that was the plan. That’s been a lot of the reason why many apartment deals have been having some issues right now is that they were banking on refinance.
Upfront if they were being proactive, they would say, “What if we can’t refinance? Is there another thing we could do? Could we sell this asset? Can we keep it as a long-term rental? Could we renegotiate the terms of the interest that we’re paying on the short-term loans? What can we do?” Having those multiple exit strategies makes it a safer bet.
This is why when I do rentals, people are like, “Yeah, but what if the values go down?” I don’t care because I’m getting paid cashflow. As long as I’m profitable, I make good cash and cash returns. I don’t care if the values go down a lot. I will put 20% or so down on a property so that there’s a little equity buffer. If I do have to sell it, at least, it gives me some wiggle room to be able to sell that property off more easily. That’s where I get multiple strategies there.
The last one is to what extent can you leverage other people’s time, money or relationships? Leverage. Can I leverage other people besides being a do-it-yourself or project? It’s because this becomes ridiculous. I want to emphasize on this how important doing due diligence is. Those are the eight questions I have. They’re not all of them but answering some of those questions and being truly deeply honest is what’s so important with this questionnaire that if you were to do that, it opens up other questions to ask. They’re good questions to ask and address so that you feel very confident knowing that you’re in the best place.
Notice I didn’t tell you what the score has to be because the score is on a person-by-person basis. It depends on how either strict you are on the scoring or how liberal you are on the scoring. That’s where it’s a little bit subjective. You have to base it on how liberal or strict the person is. I’m here to tell you that the point of it is this. You can ask whatever questions you want. There are no guarantees. That’s the truth.
I know that when I go into this investment but I’ll tell you this. What gives me comfort in going into these alternative investments, especially when I know I have people I can trust with my money? The thing that gives me confidence is knowing that I’m buying real assets. When I invest in things, I like real assets. I like tangible things that hold value. I like to know that my money is in that kind of place. It’s an asset. I know that things could go wrong and can happen.
I even had rentals that haven’t been awesome that maybe had a crappy property manager who put in bad tenants and that made it a headache for us but I still made money, even though I was a little bit of a headache and pain. Also, because I did this thing to lower my risk, I didn’t lose anything. I still made and gained money regardless of those things.
Nothing’s guaranteed in life other than death and taxes and lately inflation. We do know this. We can do what we can do. With more control that we have over our money and our lives, rather than throwing up money at financial advisors, rather than throwing it into markets where you have zero control and you hope and pray it works out, that is not a strategy for freedom.
You can never be free as long as there’s fear. Fear and faith can never coexist in the same person at the same time. It requires you to be able to do all you can to take control of your money. To take it back and then place it in those places that you know you can feel confident in and that you can sleep well at night knowing that not only does it pay you cashflow but at least, you’ve got some protection too. Thank you for reading. I want you to make a wonderful prosperous week. If you guys have questions, you can always reach out to us at MoneyRipples.com. Go to the Contact Us page if you have questions or if you want some help with this as well. Make it a wonderful and prosperous week. We’ll see you.