Proximity to Your Investments Maximizes Success

What Due Diligence Looks Like

by Dr David Phelps

by Dr David Phelps

“Real estate investing can be a great opportunity, with the right people in the right area. It can give you very stable returns, but investors must strike a balance between direct involvement and passive investment strategies. 

For those looking to gain more time, I’d recommend more passive investment opportunities…”

Proximity to Your Capital: Why Does it Matter?

Direct proximity to your capital is a significant advantage when it comes to ensuring its growth and security. Think about the benefits when investing in your own business. As a business owner, you have the opportunity to make decisions and steer the course, resulting in a direct connection to your investment. You have the ultimate control over your money by direct involvement of your business.

However, you can only manage so many businesses before it becomes unfeasible and overwhelming. While a few have the gifting to go the route of multiple businesses or practices, for most, this is not a good plan in the long run and brings up the need for exploring alternatives that provide a more passive approach.

Degrees of Separation: Wall Street and the Search for Alternatives

Contrasting the direct proximity of business ownership is investing in traditional avenues like Wall Street, 401(k)s, mutual funds, and stocks. This is where you need to consider the degrees of separation from your investment capital – The distance or amount of control you have on your capital in that investment.

Investing on Wall Street has several degrees of separation from your money and limits your ability to truly understand the culture, philosophy, and decision-making processes behind the investments.

You have no control over whether a company’s stock goes up or down, whether the business model they use will adapt to the current environment or even the information they decide to share on your investment. You can only give your money and hope you get it all back based on the little information that’s available to you.

Investing on Wall Street through 401(k)s and other retirement accounts are commonly recommended by financial advisors. I’ve met doctors and dentists who don’t even know what they’re invested in and just trust their financial advisor blindly on what they’re “earning”.  

Besides adding another degree of separation from your money, blindly trusting someone else to wisely invest your money for you does not sit well with me. You cannot trust somebody else to care more about your money than you.

Real estate, on the other hand, offers a closer connection to my capital.

The Appeal of Real Estate Investing: One Degree of Separation

Investing in alternative investments like real estate is an avenue I recommend when wanting to be more passive (not actively taking up your time) because it is only one step removed from your capital. 

When investing in rental properties you can retain direct proximity to your capital akin to owning a business because you can manage the property and tenants yourself. Your results are directly tied to your involvement. But it's crucial to consider the scalability of this approach. Again, you can only manage so many rental properties especially if you already have a full-time job.

Real estate can be a great investment, with the right people in the right area. It can give you very stable returns, but investors must strike a balance between direct involvement and passive investment strategies. For those looking to gain more time, I’d recommend more passive investment opportunities.

This is where you could invest with a sponsor that manages that rental property for you. This is having one degree of separation from your investment capital. However, you still have close proximity (especially compared to Wall Street investments). This is where due diligence begins to increase in significance to protect your investment and decrease downside risks.

Due Diligence: The Cornerstone of Sustainable Freedom

Due diligence is required to make informed investment decisions. Rather than being swayed by attractive promotional offers or flashy returns, investors should focus on understanding who the operators are and assessing their competence, their track record, and their integrity.

Many individuals enter the real estate syndication arena without the necessary experience, leading to potential risks and losses. I’ve known several dentists who have taken a weekend course and are now promoters for a sponsor, thinking they know the lingo enough to sell whatever they can make commissions on.

This is why you should steer clear of promoters who don’t know how the investment model they’re selling works. Operators, on the other hand, work directly with your investment capital. The operator is who you want to work with. They are the closest you can get to your investment capital without having to manage it yourself.

You’ll still need to conduct thorough due diligence to ensure a sound investment model. Evaluating the operators' track record is one step in that due diligence. You also have to ascertain if the operator is prepared to respond to the current economic headwinds. If they are able to pivot in changing markets to protect your capital and remain profitable.

That’s why seeking guidance from professionals experienced in that particular real estate field is critical to learn quickly and know what to look for.

Deal Structure: Negotiating for Your Best Interests

You need to pay close attention to deal structures to safeguard your interests. While syndicators and fund managers often present pre-packaged deals, it's essential to have the ability to understand the underwriting, and how to negotiate and align the deal structure with your specific requirements if necessary.

This is why you need to assemble experts around you who can guide you through all the nuances when it comes to looking at deal structures. Being in a group of like-minded investors, such as Freedom Founders, also increases your leverage and bargaining power, enabling you to advocate for fair terms and achieve more favorable outcomes.

Building a Competent Team: Advisors Who Understand Real Estate Investing

As an investor, you should assemble a competent team to support your investment pursuits. This team should include a knowledgeable CPA with expertise in real estate, capable of providing valuable insights into tax implications and investment strategies. Most CPAs know the basics of real estate but do not know enough to advise you on it. It’s crucial to find one who can.

Additionally, an attorney experienced in security laws can help review deals and ensure compliance, offering protection against potential pitfalls. Surrounding yourself with experts who specialize in real estate investments empowers you to make informed decisions and navigate the complex landscape of real estate investment opportunities.

There’s much to learn to invest wisely, with confidence in whoever you are investing with. Understanding the importance of proximity to your capital, conducting thorough due diligence, and building a competent team for yourself are powerful ways to protect your investments and progress in your journey to financial freedom

If you’d like to learn more and how you can replace your active income with passive cash flow from real estate, my team and I can show you how. The first step begins with scheduling your discovery call.

To your freedom!

– David


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.

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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