Due Diligence: Expense or Investment?

Picture of by Dr David Phelps

by Dr David Phelps


 lot of what I have the privilege of doing today is taking my experiences in life, business, and investing, and transferring those into context for other people.

 I love to help colleagues of mine in the healthcare professions or other business owners who 

are trying to figure out how to orchestrate a Freedom Plan, the way I had to figure out many years ago when my daughter was very sick.

I exited my business because I had built up a significant portfolio of passive income producing assets that would replace my active income. And now that's what I help others do today. It's my privilege to be able to do that. 

In doing so I often have mentoring or coaching calls with specific people who have chosen to work with me, and I enjoy the heck out of it. It’s a lot of fun to go back in time and see through their eyes the obstacles and challenges they're seeing. It takes me back to when I was at that point in life and asking, how do I get through this? How do I find my way through what’s currently going on in my life? How do I put the pieces of the puzzles together? How do I leverage my equity, assets, skill sets, and my time to the best of my ability without making big mistakes? That's what it's all about. 

I was on a call today with one of my mentors, which is something I recommend to everybody. Anybody who’s out there doing great things, if you think you've reached the top of the mountain summit – you're nuts. Nobody has. I certainly haven't. I want to continue to climb, improve my abilities, my outlook, and my vision about life overall. How else can I help people I want to help if I'm not on my own frontier? That’s why you need to have somebody who shares some outside perspective with you on what you’re doing. If you don’t, you're missing a big point in life. Everyone needs to have coaches in all aspects of their life, but it’s important to find the right ones.

In this call with my mentor we flipped the switch about halfway through to start talking about what he was trying to figure out. Now, he knows my expertise is in real estate – finding, acquiring, and investing in alternative investments, and how to use those investments to build passive cash flow (which is how you set yourself free in replacing your active income) and also to build an inflation hedge. In this inflationary environment, both the value of these assets will increase over time as will the cash flow. That’s what we need in life, and that's what real estate does so well, as does owning a business. Of course when you're tired of running a business, you want your assets to produce for you so you have more time off. That's what we do at Freedom Founders in a nutshell.

This mentor of mine is an international business owner, highly respected, and runs a pretty good sized company. Certainly he has his own story as we all do – downturns, coming back from a bankruptcy many years ago, having to pay everybody back – these are the kind of people I love to work with and help. I also love to invest with people like this many times because they've learned lessons. (You want to work with people who have learned a thing or two from the school of life.) 

Anyways, this mentor of mine appreciates real estate, but it's not his forte. And like most people, he felt like he just needed to find someone to invest his money with. In professional organizations such as EO (Entrepreneur Organization), YPO (Young Presidents’ Organization), or in any of the groups where there are higher level business owners, there's gonna be people who do certain kinds of investments. It could be Wall Street, Real Estate, X, Y, or Z. 

Networking and relationship capital is important, but here’s the problem: One person, who my mentor had gotten to know and had some confidence in, in addition to running a business was also raising capital to invest in apartments. Multifamily has been a big asset class in real estate for many years, and for the most part it's done well because we've been in a bull market. Anybody who does anything halfway right, in a bull market, is going to be able to make money. There's a big chase for yield and lots of capital coming to anybody who says, “Hey, I know how to do this thing called real estate.” They’ll do a syndication, a fund, this and that, and boom, the money is almost always there because there's so much money flooding the markets. (You can read here why now is one of the most dangerous times to invest.) 

So my mentor invested with this guy, and during COVID this operator screwed everything up. In our group, Freedom Founders, we got through COVID with nary a blip. Certainly there was some compression, some challenges, but they were so minimal. All of our operators are strong. Why? Because they know what they're doing. Again, why? Because we vet them. That’s a key thing. We vet, we do our due diligence, our underwriting. My friend, my mentor, who invested through this other colleague just looked at him peer-to-peer. He thought, “Well, he seems like a good guy.”

And I said to my mentor, here's where you missed the mark – and it's not just a problem unique to you, it happens to a lot of people –  You want to be different. You want to find a different pathway than everybody else because you want a different life. A lot of people like real estate, so you invest your money with this person, but you don’t really know his track record. Does he really know what he's doing? 

It then comes out that this person doesn't know what he's doing. I'm not saying he's fraudulent, but my mentor couldn't even get financials out of the person he invested with. He had to have a lawyer write a letter to this guy. The operator then states that he's holding cash back, holding back distributions just in case. In case of what? The COVID lockdown was two years ago. If you're not operating well today, then something is amiss. Something's gone wrong and even good people can go bad – but what separates people is how they react when times do get tough.

My mentor didn't have any ability to look out for this (at the time he made this investment, we weren't working together). Today, he said he wanted to go to a place that teaches how to underwrite multi-family, how to do the bidding and the metrics. I told him: No you don’t! He said he would meet a lot of other people who are doing investments, and I said it’s going to be the same thing: You’ll find a lot of exuberance, a lot of people who were inspired and had successes in the last several years with their model, but you have no idea what they know or what they don't know, because you haven't vetted them. You don't know how to vet them.

It’s what we do in Freedom Founders and how we made our mark. It's never a guarantee, but we mitigate so much risk by understanding how to do the right due diligence.

So, you either make a business out of vetting and curating deals, and you learn how to do proper due diligence on your own – or you find other people who know how to do it the right way. There's an investment of time and/or money either way. If you go the long course and try to do it yourself, be prepared to work a lot of hours (and potentially lose money) to make a secondary business – or you can go speed to goal by finding the right people. 

That’s the key: The right people who already have a track record of knowing how to do the vetting and provide that safety net. That way you won’t have to go through the brain damage of investing with somebody who didn't know what they were doing (or could have even been fraudulent) and you didn't know the difference. 

This is why when you go speed to goal, and join other people who have already done the hard work to get where you want to go, you have to decide if it’s an expense or an investment.

There’s a price either way, whether you learn on your own the hard way, or join a group that already knows how to do it. Which one do you want to pay?
To your freedom!

P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think) :

1. Schedule a Call with My Team:

If you’d like to replace your active practice income with passive investment income within 2-3 years, and you have at least $1M in available capital (can include residential/practice equity or practice sale), then schedule a call with my team. If it looks like there is a mutual fit, you’ll have the opportunity to attend one of our upcoming member events as a guest. www.freedomfounders.com/schedule

2. Become a Full-Cycle Investor:

There are many self-proclaimed genius investors today who think everything they touch turns to gold. But they’re about to learn the hard way what others have gained through “expensive” experience. I’m offering a free report on how to become a full-cycle investor, who knows how to preserve and grow capital in Up and Down markets. Will you be prepared when the inevitable recession hits? Get your free report here.

3. Get Your Free Retirement Scorecard:

Benchmark your retirement and wealth-building against hundreds of other practice professionals, and get personalized feedback on your biggest opportunities and leverage points. Click here to take the 3 minute assessment and get your scorecard.

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