The Right “Opportunity Filter” Can Revolutionize Your Investing
In today’s world of always trying to make “the next big impact” in community, business, or life, real estate investors often end up overlooking the big picture of their investment strategies. They abandon one strategy for another and pride themselves on ruthlessly cutting deals.
The constant need to shift, change, and ostentatiously grow is hurting the real estate investing industry and diminishing growth patterns. To make the most of the right opportunities, you must filter them not just by immediate profit but also by the long-term ripple impact on your business, your life, and your goals. When you apply the right opportunity filter to your real estate business and investments, everything will begin to flourish.
An opportunity filter does not ask you to set aside the importance of generating returns or making big profits. After all, most real estate investors got into the industry because they wanted to make money! However, not every investor has the same plans for that money. Some want big houses and fancy cars. Some want more time spent with family and friends or on hobbies or passion projects. Others want to give most or all of that money away entirely. Every investor is different, which is why each investor needs a different opportunity filter.
Opportunity filters help investors evaluate how new opportunities fit into their current goals and investing methodologies. If the opportunity fits the filter, then they continue to explore it. If it does not, they let the opportunity pass. In this manner, they are able to conserve their time, attention, and energy for the opportunities that are most likely to fit their personal and professional needs and goals.
Every real estate-related opportunity filter has things in common:
- It assumes the investor wants/needs to generate income.
- It factors in an investor’s time, talents (resources), and treasure (operating budget or investment capital) into the equation.
- It sets priorities for different aspects of personal and professional life.
Despite these commonalities, the opportunity filter is a highly customized tool. Ask yourself these questions about a potential opportunity:
- Does this make more money?
- Do I need more money?
- Does it have a good/better return on time than something else I am doing?
- Does it come with recurring revenue?
- Does it keep legal risks and liabilities contained to a degree with which I am comfortable?
- Is it scalable?
- Will it be enjoyable in some capacity?
- Is there adequate supply/demand in the marketplace?
The opportunity filter is designed to help you make decisions about opportunities both in light of the potential they represent and the sacrifices they will necessitate. Here is an example of how this might work:
You currently do about 50 single-family residential (SFR) deals every year and sell those properties as cash-flowing, turnkey rentals to passive investors. Your company manages these rentals in most cases and also handles acquisition, renovation, and tenant placement. An investment firm approaches you about partnering on a deal to fix and flip 60 properties over the next 12 months. The projected ROI is huge. You get excited about finally being involved in a big fix-and-flip project, but before you agree, you take 24 hours to apply your opportunity filter. Here is what you discover:
Does this make more money?
“It might, but projecting ROI on fix-and-flips a year away in some cases is risky.”
Do I need more money?
“Of course! But I was planning to scale my SFR business. I would have to put that on hold.”
Does it have a good/better return on time than something else I am doing?
“The return is definitely higher, but I am not sure it is a reliable projection.”
Does it come with recurring revenue?
“No. Once these properties are sold to retail buyers, the deal is done.”
Does it keep legal risks and liabilities contained to a degree with which I am comfortable?
“No. I once got sued over a fix-and-flip and I had to settle just to get back to work. It was awful, and I never want to experience that again.”
Is it scalable?
“Maybe. It depends on what the economy looks like in 12 months.”
Will it be enjoyable in some capacity?
“Yes. I have been wanting to get more involved in the renovation/design angle of the business.”
Is there adequate supply/demand in the marketplace?
“I’m not sure. There is right now, but I’m afraid the economy will tank and I’ll be stuck with a bunch of over-improved rentals.”
When you apply your opportunity filter to this opportunity, it becomes clear that it might not be quite as good for your business as you initially thought.
When you encounter a new opportunity, the best option is to embrace it with caution. This means honestly evaluate the opportunity. The resulting growth in both your personal and professional lives will reward and surprise you.