First, a disclaimer: I am neither a financial advisor nor an attorney. My posts are merely reflections of the experiences I have gained as an investor since the year 2000. Before you take any investment actions based on information contained within this and/or any future posts, please consult with a fee-only, fiduciary-bound Certified Financial Advisor; a Certified Public Accountant; and/or an attorney who is an expert on the specific investment instrument that you decide to pursue. You are responsible for your own financial destiny.
In any investing – whether inside or outside of Wall Street – due diligence is key. In preparation for this post, I searched for definitions of due diligence on Google. You are encouraged to do the same on your own.
Did you do it? Let’s see if you agree with my choice for the best explanation: Wikipedia. You may want to study its definition of due diligence – particularly if building your wealth is important to you. Put another way, skip due diligence at your own risk of losing everything you have worked so hard to earn. How do I know this?
When I was an employee of a company and began putting the maximum-allowed amount out of my monthly paycheck into my 401(k), the only thing I remember hearing is, “The company match.” Sounded good enough to me! It seemed foolish not to take advantage of such a great deal. I did not know anything about due diligence. Since I did not even know the terminology, as an MBA no less, I did not know to ask for it. If someone had mentioned that I needed to conduct due diligence before determining my investment choice, it clearly went right over my head. If you are reading this blog post as a beginner, knowledge about due diligence will help protect your investments for the rest of your life – if you apply the knowledge on every single investment decision that you make.
Although the terminology itself, due diligence, may be new to some, it is something that most of us do naturally in our daily lives. For instance, if you are choosing a school for your child, you would check out the alternatives available, figure out pros and cons of each, and determine what school best fits your child’s needs. As a parent, depending upon how many children you have, there is a limit to how often you would repeat the same sifting process. In contrast, a pilot goes through the exact same flight check list prior to every single flight. Likewise with investing.
A pilot, no matter how experienced, is required by law – for the sake of safety – to go through a detailed flight check list, one item at a time, before each flight. With investing, although there is no law that requires investors to review a due-diligence check list, most experienced investors do follow a certain set of criteria before making the final investment decision. No matter how experienced, it is wise to rely on a checklist of due diligence. Such a list of due-diligence items can vary based on your investment choice. What you need to get done as part of due diligence for investing in real estate is different from, for instance, precious metals.
It is your responsibility to figure out what due diligence you need to get done within the investment avenue of your choice BEFORE you invest your hard-earned money. Let’s repeat what I just said in a different way:
- Question: How do you protect your investment?
- Answer: By conducting thorough due diligence – every step of the way.
Your first step may be to look for several due-diligence lists available on the Internet for the specific investment you are considering. For instance, if you are looking to buy and hold a foreclosed property, you may want to type in the following sets of key words:
- Due diligence, real estate
- Due diligence, foreclosed property
Again, these are just a couple of starter examples. Some of the lists are provided by real-estate companies that may want to assist you in your purchase of foreclosed properties. This opens up yet another need for due diligence about choosing the right real-estate company that is experienced in supporting investors. Remember, at this stage, you’re only trying to figure out what “due diligence” you may need to do. Your goal is NOT to sign up with anything or any company. Keep in mind that many real-estate companies are not investor-oriented; their focus is on retail, meaning they sell primarily to consumers rather than to investors. Do NOT pay retail for your investments.
As you get into actually buying an investment property for the first time, you will begin to see many facets that you may not have considered when buying your own residential property – such as the need for a certain return on investment within a specific period of time. This is why, as mentioned in the September blog post, working with and learning from an experienced coach is worth the cost. Of course, if you choose to hire a coach, then doing due diligence to find the “right” coach becomes step #1.
I know what you’re thinking. And, no, I do not offer any coaching service; nor do I intend to in the future – at least as of this writing in October 2012. My focus is to continue minding my own investing business. I am, however, committed to giving you, the readers of my monthly blog posts, the lessons I’ve learned – so that your investing career goes at least a little smoother than when I first started out in 2000, not knowing anything at all about the topic. The only thing I knew was that my retirement funds in my 401(k) were at risk.
Whether or not you can afford a coach right away, assuming that you are planning to invest in real estate, I would highly recommend that you join a local Real Estate Investors’ Association (REIA). It’s a good place to network with like-minded people, for a nominal annual fee, particularly if you’re new to real-estate investing. Unless you live far away from the nearest city, you should be able to find one in your area from National REIA. Make sure that the one you choose is a non-profit organization, devoted to educating its members.
With every new contact you make, even at your local non-profit REIA, remember my posts on investment fraud and the so-called “gurus.”
Coming up next month: Stick to the basics!
What investment topics would you like me to cover? I would welcome your suggestions, comments, and/or questions!
