Thursday, February 27, 2014

Banker's Secret Lesson #1, Cover Your Downside

My mentor once taught me, never work without a safety net.   

Construction of the Golden Gate Bridge
This is the same lesson that can be learned by observing the world's largest banks and investors.  

Banks are very good at covering their downside.  They do a great job at mitigating any loss that might come their way.   The cover the downside and let the upside take care of itself.   In business, nothing is guaranteed; however, what banks do it try to protect themselves against loss.   

Over the next several blog posts, I'm going to reveal lesson's learned from banks, and how you can cover your downside on real estate deals.    Begin thinking with the bankers mentality and you'll begin to see things with a different lens.   Try to figure out how you can be on the receiving side of inflation, how you can be on the receiving side of appreciation, on the receiving side of opportunity costs, all the while - protecting your downside. 

The most obvious way banks look to protect their investment is asking for some type of collateral.    If I came to you with a gold brick or a Lamborghini, or something of great value and asked you for a loan at 10% of the value of the thing, would would be a good deal?   Would you be OK giving me a loan for let's say $10,000 if the thing was worth $100,000?    You can't lose right??!    This is how banks look at lending opportunities.   They say, "if everything goes bad and the person stops paying, can I recoup my investment and maybe even make more?"

As investors, we need to always be thinking of how can I cover the downside.   Regarding collateral here's an interesting question:  Are there ways to make the collateral worth more once you've loaned against it?   How can you continue to increase your upside and also make the downside so attractive that you make money in either case.   

More later.  Keep thinking of ways to cover your downside.    Till next time. 

1 comment:

  1. Have you ever worked with a seller in bankruptcy? What do you need to do?


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