Pro Athletes: Know when an investment loan risk can change your life – or ruin it.
Take as a for instance: A third year NFL player who's had a few stand out years nearing a new contract, and is expecting a salary jump equal to his impact. He's confident in his game, he's also now confident mixing with businessmen, owners and managers. Opportunities come his way regularly and more are expected with the new contract. He'll see options for real estate investment with varying degrees of risk. Friendships and emotion may come into play in his decisions. After all the loan risks have even been spelled out to him, he's confident – and no one gets into an investment expecting failure. But if the deal goes into default and he hasn't protected himself, he could lose a whole lot more than his initial investment. Confidence in his game came from years of practice and hard work but bringing that confidence to investing without preparation could affect him for years to come.
I'm often called for help with defaulted loan negotiations by high net worth clients who have made investments involving a personal loan guarantee that has them in a perilous financial situation. Often their problem could have been avoided altogether through basic investment analysis combined with prudent asset protection planning.
Sometimes they don't even know the difference between a straight cash investment, where their risk involves their original investment capital only vs an "at risk" investment, which involves the investor becoming liable for the entire project's debt by signing on as the guarantor of a bank loan to the project.
The typical example is investing in a real estate deal either with pure cash, called an "equity" investment, by putting up cash for say 20% of the deal vs an equity and "risk" investor by putting up cash and taking the additional risk of signing a bank loan to finance the deal for say 40% of the deal. Is the additional return worth the risk portion of the investment? It's hard to say without a detailed analysis of the specific project, however the investor is many times too consumed with the potential returns to spend the proper due diligence on ways the deal going south could impact them in a negative way – beyond any cash invested. Even a small project can involve loans in the millions of dollars, and if the project fails, the banks will be looking for the guarantors to pay off the entire loan. In a financial analysis the additional risk might seem worth it, but if there are multiple loan guarantors and only one of them has available assets that are not protected, that guarantor could be faced with the liability of the entire loan amount – which can be a pretty daunting prospect.
When I'm asked about the quality of a potential investment, especially when the investment involves direct ownership of a business or real estate, my first question is always "are you signing any bank loans personally?" And, if they are, "have you protected your personal assets?" All too often, especially in this economic climate, the investment later hits a wall, fails to perform as hoped, and the debt is looming as a catastrophic liability to the investor who signed on as a guarantor of the loan. In many cases the investor did not receive enough of an increase in potential profits to in any way justify the risk of signing for the loan. In other words they would have been far better off to be a passive investor, contributing and risking only cash, rather than risking a loan being called and the bank reaching into their personal assets, including cash, stocks, cars or homes.
Does that mean an investor should never sign a loan guarantee? The additional risk can be very lucrative, but the answer depends on the investor, the investment, the financial strength of any other guarantors and the level of the investor's personal asset protection. If the returns justify the risk and the guarantor has prudently taken asset protection steps, then the right deal may justify the additional risk. The decision should be based on a clinical look at the facts, including a realistic analysis of what could cause the deal to fail, and what the personal asset ramifications are in case of a failure, not solely on how much confidence the investor has in the deal.
The goal is to win the game without the alternative costing you an arm and a leg.
Source by Andrew Howe