“Novice investors ask how much I can make on a particular deal. Seasoned investors ask how much I can lose.”
It sounds simple and almost obvious. But the more I invested, the more I realized how rare it is for people to actually internalize this.
Most investors lead with upside potential. They see an expected return of 18% and start calculating how much they will make. They get excited imagining the best-case scenario.
Seasoned investors do the opposite. They assume that things will go wrong. How much of my capital is at risk? What is the worst realistic outcome? Can I survive?
This single shift in thinking is the difference between building long-term wealth and blowing yourself up.
It’s not entirely your fault if you focus on returns first. Our brains are designed for it.
Daniel Kahneman, the Nobel Prize-winning psychologist, has spent decades studying how people make decisions under uncertainty. One of his key findings: We consistently overweight potential gains and underweight potential losses. It’s called optimism bias, and it’s ingrained in our psychology.
When someone shows you an investment with an expected return of 15%, your brain lights up. You start to imagine what that money could do for you. The risk part of the pitch deck? You shave it. You assume it won’t happen to you.
This is why casinos continue to exist. That’s why people buy lottery tickets. And that’s why so many investors get burned by deals that looked great on paper.
The antidote is discipline. Train yourself to ask the hard question first, before the excitement takes over.
I learned this lesson the hard way.
In the mid-2000s, I was buying rental properties like everyone else. The market was tearing apart. Prices continued to rise. I was over-indebted and convinced I was a genius.
I never seriously asked what would happen if the market turned. I have not stress tested my portfolio against a recession. I assumed the good times would continue.
Then 2008 happened.
I had negative cash flow, underwater properties and no buffer. I wasn’t the only one. Millions of investors were wiped out because they asked, “How much can I make?” without ever asking “how much can I lose?”
It took years to recover. And the tuition was expensive. But the lesson stuck.
Fast forward to 2022. Interest rates spiked after years of near-zero interest rates. Many real estate operators who had loaded themselves with short-term, variable-rate debt suddenly couldn’t make their numbers work.
These were not minor players. Major syndications went sideways. Investors who were promised a return of 15 to 20% ended up in capital calls or faced total losses.
What happened? The operators asked the wrong question. They optimized for the upside (cheap debt, aggressive projections, fast growth) without adequately stress-testing the downsides (what if interest rates double? What if we can’t refinance?).
The investors who made these deals also asked the wrong question. They looked at the expected returns and assumed that the operators knew what they were doing. They did not discuss the debt structure, the assumptions behind the projections, or what would happen if conditions changed.
The investors who avoided these blowouts? They asked different questions. How much debt is there on this deal? What is the interest rate? Is it fixed or floating? What happens if the occupancy rate drops by 10%? What is the break-even point?
Same market. Same opportunities. Completely different outcomes depending on the question you led with.
#Appraise #Real #Estate #Deal #Properly