What Does A-Grade Deal Flow Really Mean?
In this week’s episode, I unpack how to evaluate the quality of deals, whether they’re A-grade, B-grade or C-grade, to establish if the deal aligns with your risk profile and the goals you’ve set. The next step is to cultivate a good deal flow, and a way to do this is by building the right kind of relationships. Remember, the media isn’t always the best place to source information.
So, I discuss why it’s important to know:
- the common challenges most investors deal with,
- understanding and evaluating the quality of deals,
- whether the deal matches your risk profile,
- whether the deal aligns with the goals you’ve set,
- how much speculation is involved,
- why your definition of an ‘A-grade deal’ will look different to others,
- the importance of having a definition of what ‘A-Grade’ is to you
- how to cultivate better deal flow,
- how to focus on relationship capital, and
- where you are consuming investing information from.
00:00:00 – Intro
00:01:37 – Recap of Part 1: Freedom Formula Unpack
00:02:54 – The Next Step After Figuring Out Your Formula
00:04:38 – How Strong is Your Pipeline of Opportunities?Read More
00:07:46 – Have You Been Active in Fostering a Network of Exclusive Relationships?
00:11:09 – Traditional Vs Alternative Investments
00:14:34 – Why Alternative Investments Are Challenging to Have Access to
00:16:39 – Salena’s Case Study: Using Alternative Strategies in their Freedom Formula
00:21:01 – Final Thoughts & Part 3: Freedom Formula Unpack
00:22:13 – Outro
Once you’re able to evaluate the quality of deals, whether they’re A-grade, B-grade or C-grade, you can establish if the deal aligns with your risk profile and the goals you’ve set.
Each person will have their own definition of what an A-grade deal is, and it’s important to establish your own clear personal definition.
The next step is to cultivate a good deal flow, and a way to do this is by building the right kind of relationships. Remember, the media isn’t always the best place to source information.
I’ll unpack each of these thoughts to help you streamline your investment strategy.Read More
The Common Challenges Most Investors Deal With
One of the big obstacles out there, particularly for younger, newer investors, is that it’s really hard to distinguish between what’s real and what’s marketing.
There’s an industry surrounding property and investing at large that’s hell-bent on motivating us to take action through FOMO or fear of missing out. Because competition is incredibly high, that means that even if a deal is really great, we don’t have the time to marinate, and we generally have to pull the trigger really fast.
For many years I searched for a way or a methodology of evaluating deals to understand the difference between what was great and what wasn’t. I never wanted to rush to make decisions that I hadn’t thought through. And, I wanted to put myself in a position where I was prepared so that before I actually found the deal or the end investment, I knew exactly what I was looking for.
So, I’m assuming that’s something that a lot of other investors are looking for, as well.
Understanding & Evaluating the Quality of Deals
So the question is, how do you understand and evaluate the quality of deals? And the thing is, everyone’s definition of a good deal is going to vary.
I was speaking to a successful fund manager the other day, and their whole strategy is based on going into unpopular areas, areas where basically nobody wants to buy, finding an asset that maybe has the fundamentals of a good structure, but no one wants it because they perceive it to be a higher risk, a more tricky project. And these are big commercial investments, might I add.
So they go in and purchase these properties at below market value. And then they hustle and work really hard using their relationship capital to find a cornerstone tenant and then get leases for the rest of the building. And so, through that process, they’ve had a very successful business and a fund that they’ve been able to offer both cash flow and capital to investors.
That’s one extreme, but for the average person, they might look at that strategy and say, “Well, that that just doesn’t work for me at all; why would I go down that path?” So it’s really important that I prequalify everything that I’m about to say with, “everybody’s definition of what is an awesome deal is, is going to vary.”
Does the Deal Match Your Risk Profile?
The first aspect of evaluating whether a deal is for you, by definition, A-grade or not, is really about knowing yourself. Does the deal that you’re looking at match your risk profile?
I speak to people all the time who are trying to chase down development deals because they perceive them to be a high return and a great profit. But when it comes down to it, they don’t have the skillset and the risk profile to put up with potential losses if they miss-calculate or get things wrong.
How Much Speculation is Involved?
What does a quality deal look like to you?
How much speculation is involved?
Is it a deal or an investment where you’re going to add value to the investment to create forced appreciation or profit upfront?
Are you buying this asset for cash flow when you don’t really care whether it goes up, down or sideways?
How much are you relying on a rising market or a stable economic climate for that investment to succeed?
Inside the Freedom Warrior mastermind, most of us are in a situation where we’ve got enough capital, and we’ve got enough investments. What we’re really trying to do is ramp up our cash flow.
So the definition of an A-grade quality deal definitely is more of a focus on cash flow.
Your Definition of an ‘A-Grade Deal’ Will Look Different to Others
When I use the jargon around A-grade, B-grade, C-grade – it’s A-grade by my definition or A-grade by your definition. It’s really based on what you’re trying to achieve, your alignment with your goals, and then a reflection on how much the economic environment is going to impact it.
One of the most awesome aspects of how some of the dealmakers or deal architects that I work with operate is, they’re looking for deals that I can participate in, for example, as a passive investor. Whether that’s because I’ve gone through syndication, or a fund, or private fund, I kind of structured on the armchair investor – but I’m relying on their understanding on kinds of deals.
I’ve done my due diligence on this particular person or group, so I know exactly what kinds of deals they go for. And I’m comfortable that all of those aspects around alignment for goals, alignment for risk, and all those things I just mentioned, are congruent with what I want to do.
And even within Freedom Warrior, what I often do is coach people on this idea of not chasing yield. Even though cash flow is the goal for many of us, I encourage people to really continue to focus on diversification and not put all their money into one basket purely because it pays the highest rate of return.
When you’ve got a bit of capital behind you, you can have the luxury of saying, “Put 20 grand there and 50 grand there and 100 grand there.” Spread the love so that you’re truly diversified across geography, strategy, liquidity, and all the variables that I’ve talked about in other podcasts.
Remember, knowing what you want and who you are is super important, and unpacking that isn’t necessarily an easy exercise. My suggestion is to pick those on a high level, at least. Ask yourself where you are on your wealth creation journey and how much risk you’re prepared to take.
If you’re someone who’s younger, maybe you’ve got time to recover, maybe your risk profile and your risk appetite are higher than someone who’s approaching the finish line.
My risk appetite has probably doubled in recent years; I certainly don’t feel like rocking the boat on anything that I’m doing. So I’m really mindful that every investment that I take on, whether it’s in traditional real estate or alternative real estate, has congruence with all of the things that I mentioned.
But I’m also realistic now about the risk that I’m prepared to take. And to be frank, I’m not prepared to put too much of my capital at risk on any particular investment, no matter how lucrative it is.
The Importance of Having Definition of What ‘A-Grade’ is to You
Once you’ve got your parameters clear around your definition of A-grade, B-grade and C-grade, then it becomes easier to rule a line through things and just go, “Nah, I’m not gonna do that. It’s too much risk, or it’s a bright, shiny object.”
One of the things that I was very guilty of earlier in my investing journey was being easily persuaded by other people’s opinions of what made a good investment – instead of stopping myself and saying, “Gee, does this investment actually makes sense to what I’m trying to achieve?” If I had done that more often, I think I would have been four or five times ahead of where I am today.
Cultivating Better Deal Flow
“Deal flow” is a term that was coined by investment bankers and venture capitalists used to describe the rate at which business proposals and investment opportunities are being received.
It’s not meant to be a rigid measure but rather a very qualitative thing. It’s meant to indicate whether the flow of opportunity that you have is good or bad.
One of the reasons that people come and join us in Freedom Warrior is they’re looking for access to A-grade vetted deal flow at a high volume so that they can just cherry-pick the deals that suit them at the time that they have the capital to deploy.
As an investor, what you need to be thinking about is how to cultivate better deal flow.
Focus on Relationship Capital
It’s really, really important to focus on relationship capital. This is something I didn’t really learn ‘til the second half of my journey as an investor, but it was single-handedly the thing that started giving me the exponential results.
Find a way to build a network of individuals who have access not only to the sorts of deals that you want but who are part of the industry, part of this world, who you can find ways to stay in touch with.
Something that I find more common in younger people is that they are really hungry for this knowledge. They want to understand how to get the mentors and the people that they can learn from, but they don’t necessarily know how to go about doing it.
I’m not suggesting that I’m very good at this necessarily, but it’s something that I’m just very consistent about. I can certainly name at least half a dozen other people in my close circle of friends who are much better at this than me.
Try to build relationships with people who will help you develop your property portfolio and wealth portfolio over the long term. Come from a place of humility if you want to build relationships that endure. Genuinely want to get to know people and understand who they are, how they achieved what they did, how they sourced the deals.
And don’t feel like you’ve got to go to the top of the tree for a lot of this information. There are many groups where you can learn this stuff. There’s a lot of really great information out there. There are forums, Facebook groups – think about where the people who have the results that you want are hanging out.
And, sometimes, they come in peer groups that are unrelated to investing. If you’re a business owner, where do the successful business owners in your world hang out? What are they doing?
Being Aware of Where You Consume Investing Information From
The media, the news, wealth professionals in general, all unfortunately have a highly vested interest in seeing the greater population invest in a certain way.
This makes it really tough for anyone, including me, to distinguish what’s real and what’s marketing.
As of 5 July 2021, there are over 211,000 people who associate with being in the rental hiring and real estate services space. Now, this is an interesting statistic, and I actually think that numbers are underdone because it doesn’t include things like buyer’s agents and other property professionals. But that is a huge percentage, it’s almost 1.6% of the total workforce.
When you include everyone associated with the wealth industry, including insurance brokers, mortgage brokers, etc., it’s a huge percentage of our population. So with residential real estate dominating all forms of investment in this part of the world (Australia and New Zealand), it’s really important to recognise where your information comes from.
Look for as much independent data as you can rather than opinion, and learn to pull those two things apart to make informed decisions.
Building wealth doesn’t need a lot of time. But it certainly needs an awareness and a desire to be the person who’s in control of the decisions that affect you and your family for the rest of your life.
Understanding what a great deal flow means is really important.
Figure out what your risk profile is and what investments fit inside that, and then carve that down even further to figure out which styles of investing and which strategies are in alignment with the objectives that you have in the current environment.
If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.
Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!
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