When you're presented with investment opportunities, it's easy to get caught up in worrying about the big numbers and what they could mean for your bank account. Unfortunately, many talented professionals get spooked by numbers like $1 million, $5 million, or even $50 million and jump ship before even considering the potential outcome of a great deal.
Yes, money and cash flow are important in building a real estate investing business. Yes, you should be smart about where you decide to place your funds and how you plan to repay investors.
However, that doesn't mean that the big number deals are beyond your abilities or that they're too risky. It all depends on the factors within the deal, how you interpret them, and how you deploy your strategies to accommodate them.
How to Use The Law of Numbers in Real Estate
The Law of Numbers, in real estate terms, refers to the concept that if you invest in multiple assets rather than a single asset, the negative outcomes on any one deal will be less painful to you as an investor. In fact, investing in numerous assets at a time will allow you to recover from any issues or financial hits that you may endure.
Risk is a part of any investing business; but the Law of Numbers and multiple-asset investing can mitigate that risk and create a healthier cash flow for you overall.
For example, let's say you have $100,000 to invest. If you use the full $100,000 on a single asset, you'll be in hot water if something goes wrong with the property. However, if you invest $25,000 in four separate assets – for the same total of $100,000 invested – you have several opportunities for things to go right and cover the costs associated with one or two bad assets.
Invest More, Get More
Typically, it'll require larger sums of money to invest in multiple assets at one time than if you invested in a single asset. However, you'll be investing in an increased potential in return and more peace of mind. Buying multiple assets creates a safety net for you and your money.
Now, before you object with, "But I don't have a million dollars to throw at a bunch of assets right now," remember: In real estate investing, there is always a way. Part of growing your business and increasing your access to investment opportunities is keeping an open mind to the possibilities.
For instance, if you don't have enough money to invest in multiple assets at a time by yourself, a joint venture can be a winning situation in which you get support in the form of funds, build valuable business relationships, learn from your partners, and protect yourself from having to bear the brunt of any risks by yourself.
Find a Joint Venture Partner or Investor
A joint venture partner will allow you to share the risks and rewards and not have to carry an investment all on your shoulders. If a deal goes bad or you face extra expenses, you'll bear the burden with a partner. A joint venture can also give you the capacity to buy more assets than investing alone.
Let's say you only have $10,000 to invest and your money doesn't stretch as far as you'd like. You can always work with an investor who will loan you a larger sum or add their own funds to the pot to go in on the deal with you.
Instead of putting your entire $10,000 into one asset and having to wait for it to come to fruition, find an investment partner to bring $90,000 to the deal and together your money will stretch further.
With your resources combined you'll be able to buy 10 or more assets that you can work through together, instead of buying one property that puts you at risk of losing it all.
Build a Safety Net in Your Investment Opportunities
Regardless of the type of investment opportunities that are presented to you – whether it's notes, rehabs, or flips – create a safety net for yourself using the Law of Numbers. Like spreading your weight out over thin ice, investing in multiple deals can maximize your opportunity for a positive ROI.
Now, we’ve talked a lot about loss and risk here. However, it’s important to keep in mind that if you are aware of the risk factors that influence your investing opportunities, you can smartly accommodate them by adjusting the amount you offer on an asset.
Want to learn more about the risks of investing opportunities? Check out our Risks of Investing series.
Then, subscribe to our YouTube channel to get information on how to get past investment hurdles and strengthening your safety net.