11 Crucial Questions You Should Be Asking Before Investing

You probably already know that investing can be a risky business. Some people make it big. Others lose everything. There's always going to be those wanna-be Bernie Madoffs to watch out for.

So before you invest your hard-earned savings or your self-directed IRA into someone's business or real estate, you need to ask questions either to yourself or the person/business receiving your money.

We're here to encourage you to have a healthy level of skepticism. Anyone asking for your money should be comfortable answering questions. Let's go over 11 tips & questions to help you avoid legal trouble and bad investments.

Top 11 Questions You Should Ask About New Investments

1. How does this investment fit into your portfolio?

   It's important that you diversify your income to maximize your returns and protect yourself against any unforeseen economic shocks.

2. Are you being pressured to invest?

   If you are told that this opportunity will pass if you don’t invest now, then let the opportunity pass. Most scams use this technique.

3. Have you been given documentation?

   If you aren’t given documents outlining what has been explained to you in conversation or what has been put into a presentation then don’t invest.

4. Do you understand how you will make your money back?

   If you don't understand how the business or investment makes the returns being promised, then don't invest.

5. Have you been offered commissions?

   If you’re told that you can get a commission for bringing others to invest into the same company, be skeptical. Especially if you don’t have a license to receive such commissions then don’t invest. If they're willing to break the law, they're willing to screw you over.

6. What's going to happen to the money you loan them?

   If you are loaning money for a real estate venture, then get a deed of trust or mortgage on the title to the property protecting your investment. Also, make sure that you get a copy of the title report or commitment showing what position your loan is being placed into when the deed of trust or mortgage is recorded.

Lenders: Do What the Bank Does.

Create lending instructions to the title company closing the real estate transaction. Tell the title company to only use the funds being loaned when the borrower signs the note/loan documents and when all other defects to title have been cleared or disclosed.

7. Have they filed with the SEC?

   If you’re investing into a PPM (Private Placement Memorandum) or offering you should receive lots of documents outlining the investment, the use of funds, the background of those managing the company, and also documents regarding your rights as an investor.

Also, check to see if the PPM or offering was properly filed with the SEC by going to SEC.gov and checking the company name in the SEC database. If no filing record exists for the PPM or offering with the SEC, then the person raising the funds has possibly disregarded the law. They'll probably "disregard" your money next!

8. Are they credible?

   Investigate the background of the person you are entrusting your money with. When you are investing with others, you need to think like the bank and do what the bank does.

What is this person’s credit history, employment or prior business experience? What's their plan? What are the terms of the investment? Is there a realistic rate of return that fairly recognizes the risk being taken? Remember, the person who has your best interest at heart is you, so be vigilant.

9. Have you looked closely at the documents provided to you, if any?

   Make sure a lawyer representing your interests reviews the documents. A second pair of eyes always helps. If a lawyer drafted the documents already it is still important to have a lawyer look at the documents as they relate to your interests and with an eye towards protecting you.

The "small print" in investing can be tricky. Many investments have clauses that can impact your ability to get your money back. Some even give the company raising the money the ability to pay whatever compensation to themselves they desire, which will eat into the bottom line of your profits. If you don't know what you're looking for, find someone who does. More on that in a moment.

10. Have you sought a second opinion?

    Seek the opinion of another investor, business owner, or friend whose opinion you trust. Sometimes when you explain the investment to someone else they can help you find issues to consider and questions you should be asking.

11. Are you willing to lose the money you're thinking about investing?

    Be comfortable saying no and only invest what you are willing to lose. Just like you would in Vegas.

Sometimes you may need to get out of your comfort zone by asking lots of questions, by demanding additional documentation, or by simply saying no. Remember, you are the only authority on what types of investments are best for you.

Of course, you're also human and flawed. It's best to seek professional advice if you're uncertain about an investment for any reason. At Royal Legal Solutions, our attorneys are investors themselves. If you need a second opinion, an extra pair of eyes, or assistance managing your investments in a corporate structure, start with our investor quiz and we'll take it from there.