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“Risk comes from not knowing what you’re doing.”

— Warren Buffett

In my book, Fire Yourself, I have a secret system to vet any deal.

Today, I’m going to let you in on this secret because I think it’s something most people get wrong.

I use a chart featuring the market, the operator, and then the deal.

Remember that order; it’s important.

A lot of people start with the deal and then work backwards.

Don’t do that!

You should start with the market.

If you do, you’ll find better results.

I’ve used this strategy in many markets: ATM machines, multifamily, oil and gas, venture capital, self-storage, car washes, and other private equity areas.

You can use it in those markets too, or go your own route.

This secret system can analyze any deal out there.

Let’s jump into it!

1. Vet the Market

Tony Robbins says the quality of your life is a direct reflection of the questions you ask yourself.

If you want to have a high-quality life, you have to ask yourself good questions.

With investing, we also need to ask better questions to get better results.

As a reminder, the chart I use starts with the market at the top, then the operator, then the deal at the bottom.

A lot of people say you should start with the operator and then go to the market.

I always start with the market.

You can do a lot of things wrong if you start somewhere else.

When you look at the market, you’re familiarizing yourself with the investment.

You’re getting educated.

If you are in a multifamily deal, you’re looking for a market with job growth, population growth, and income growth.

Those factors put an upward pressure on rents.

With all of our investments, we ask: Is this a growing market?

The ATM space is growing about 4% per year in the number of transactions.

Over 30 million people in America don’t have a bank account.

Instead, they’re operating in cash and prepaid debit cards.

That bodes very well for continued growth in the ATM market.

We also used this market-first method with senior housing.

There will be a crazy amount of growth there in the next five to ten years.

The silver tsunami has been studied in Singapore, showing a future of strain on long-term care facilities.1

This is great news for senior housing and shows the bright future of that entire market.                                                                                                                             

We look at oil and gas and think that’s a growing market because of underdevelopment.

There’s no way to get where we want to go simply by going green.

We need industries like oil and gas.

You should also ask yourself:

What are the barriers of entry in the market?

Can anyone compete with you in that specific market?

What are the market risks?

Take cryptocurrency for example.

There are a million different types of cryptocurrencies.

What separates the one you may be interested in from any other type?

Figure out how you want to vet and use that system to vet a specific market.

If you find the right market, you can have a lot of success.

2. Vet the Operator

Next on the chart is the operator.

You want to vet the operator.

If you’re not sure where to start, I usually ask about their values to see if they match up with ours.

We try to be very conservative on our underwriting.

We value communication and transparency.

We also like to have long-term partnerships.

According to this article in the Journal of Business Research, long-term business partnerships give a huge competitive advantage.2

If you don’t have the opportunity to call them right away, you can go to their website and search online for testimonials.

Another way to vet is to see if the deal they’re doing is similar to any others they’ve done.

If so, how does that change impact the deal?

What’s their track record and can they share it with you?

These are really important questions that can give you a better idea of who you might be working with.

And when you know your operator well, the deal will be that much stronger of an investment.

3. Vet the Deal

After you’ve vetted the market and the operator, it’s time to look at the specific deal.

You first want to figure out if you fully understand the deal.

There are some deals I look at where I’m completely lost.

In those times, I remember what Warren Buffet once said:

“We don’t invest in anything we don’t understand.”

Warren Buffet is one of the smartest investors in the world.

He knows what he’s talking about.

You need to know how you’ll make money in a specific deal.

But even more importantly, you need to know how you could lose money.

Ask the deal sponsors about the primary risks.

They should tell you.

Now, I want to share a few green flags I have for deals:

1.     The operator has similar values.

2.     The operator has a great reputation and great track record.

3.     The deal makes sense; I see how I can make money.

4.     There’s a growing market.

5.     I see all sides of the deal, both the downside and upside.

6.     There’s limited downside risk.

With limited downside risk, I think of the book The Dhandho Investor by Manish Pabrai.

He talks about the idea of “heads I win, tails I don’t lose much.”

It’s an asymmetric return.

Your upside is higher than your potential downside.

There’s a chance I lose some money, but there’s also a chance the deal goes 10x.

Thank you for taking the time to educate yourself.

Now I want to hear from you!

What are some green flags in the deals you vet?

Let us know in the comments.

Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.

If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.

Check out my bestselling book on Amazon!

Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.

Works Cited

1.     D. Seth. “Silver Tsunami: Aging in a Shrinking Singapore.” Harvard international review, 34 (2012): 2.     John H. Bantham, K. Celuch and C. Kasouf. “A perspective of partnerships based on interdependence and dialectical theory.” Journal of Business Research, 56 (2003): 265-274.

Bronson Hill

Bronson used to work as a consultant for a medical device company but switched to investing in apartment buildings to make his money work for him. He started with a single rental property that made good money and, after some advice from a family member, moved into bigger real estate projects. Now, he's all about helping others get into this kind of investment to earn money without having to work all the time. When he's not dealing with investments, Bronson loves to travel, write songs, stay active, and help fight modern slavery through his work with Dressember. He believes in working smarter, not harder, and wants to share how that's possible with everyone.

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