A few days ago, I was having a conversation with a good friend of mine about a real estate investment that was quickly falling apart.

The conversation was brutal in every way. The asset was objectively good, but despite everything looking great on paper, this investor and others involved in the deal are now on track to lose millions—all because of recent changes to the market. The worst part is that just a few years ago, this same deal would have been an easy homerun.

So what has changed?

Volatility across all sectors of the market is at an all-time high. The stock market is in a plunging downturn, shedding a staggering $5 trillion in just three weeks as uncertainty roars through Wall Street like a wildfire, while the S&P 500 has declined 10% from its peak, with losses fueled by talk of tariffs, slowing economic growth, and a sharp decline in AI-driven stocks like Nvidia.

In the real estate industry, inventory is starting to climb but it’s  still far below where it needs to be, and home values are beginning to decline in some of the previously hottest markets while appreciation has all but ground to a halt across most of the country. Factor in inflation, relatively higher mortgage rates than we’ve seen in recent years, and growing debt at national, corporate, and personal levels. Even the crypto markets are down compared to last month.

The US economy is essentially in freefall, and that adds a new facet to the already significant challenges that come with investing.

An uncertain market like we’re facing today requires everything a good economy does but it also requires a far deeper analysis of the assets you’re considering investing in—also known as due diligence. Experts

Reevaluate and revise your own underwriting process

It’s easy to get settled in your ways as an entrepreneur because there are so many things you have to do on a daily basis, so once you develop a process for a task in your business, you tend to keep it until something eventually breaks.

Underwriting is one of those tasks. While this is a critical part of choosing whether to invest in an asset or not, it’s also one of the least updated processes because investors tend to adopt an “if it ain’t broke, don’t fix it,” mindset. They often feel like a process that has historically worked well for them is a far lower priority to other tasks, especially if those other tasks are seen as trendy, like using AI to automate certain activities.

Underwriting is boring, and because of that, it’s a topic people are rarely passionate about until it causes a significant problem, but by then, the damage has already been done. A flaw in your underwriting can expose your portfolio to tremendous risk, and a single loss can undo years of consistent growth. The impact can be devastating, so it’s critical to review your process from time to time.

Noted financial expert, Dr. David Phelps, says that as the overall economy weakens, businesses of all types weaken as well, exposing you to greater investing risk, so your underwriting needs to evolve to better protect you in today’s environment. He outlined a summary “checklist” he uses as the foundation of his own underwriting process, which his team recently updated to make a more comprehensive and accurate assessment of any assets he considers investing in.

• Seek alignment of interests: Look for investment opportunities where the incentives of all parties involved are aligned with the success and sustainability of the project.
• Demand transparency: Insist on clear, transparent communication regarding fees, the structure of the investment, and the long-term strategy.
• Compare fee structures: Don’t just assume or take it on faith that fees are “industry normative.” Research and get counsel. Consider whether the fee structure properly incentivizes the sponsor to ensure the project is profitable for investors.
• Affiliated party relationships. Read or have someone competent review the legal offering and look for affiliate commissions and payouts that may strip the distributions to you, the passive limited partner.
• Limited partner rights. Understand the scope of control that the GP and Co-GP have and under what circumstances they can be replaced if needed.
• Educate yourself: Arm yourself with knowledge about different investment models and their implications to make informed decisions.
• Look for long-term players: Evaluate the experience of all GPs in the deal and look for operators doing business for the long-haul; building collaborative relationships with long-term operators is the pathway to success and profitability.

*Note: This summary is an excerpt from a more comprehensive article Dr. Phelps wrote about the evolution of risk in real estate investing today. He writes a regular column here at Newsmax.

Thomas Carver agrees. As the managing partner at Harren Equity Partners, he warns that most investors today, unfortunately, do not have sufficient knowledge of the industries they’re investing in to adequately underwrite an investment. And he says “It’s not just about the typical KPIs that most people use to evaluate an investment opportunity—it’s about digging deeper than most are willing to dig to spot the hidden red flags and opportunities that others overlook.”

“That,” he explains, “is what separates the average investors from the great investors.”

Carver says you need to be consumed with the industries you invest in, and he follows his own advice by investing in a small handful of industries

“Look at cloud technology, for example. If you’ve considered investing in this space, which is a solid opportunity with lots of long term growth potential, you might think to start researching which new companies have the best servers and software? Who has the best marketing campaigns and partnerships? Who are their competitors? And then, who are they really competing against?

Because while you can probably identify a lot of the competitors in the market, you may overlook giants that most people don’t realize are even competing in this industry. The big boys like Microsoft, Google, and Amazon are all known for what the public perceives as their core business models, but when you look at their financials and see that they actually make a large share of their revenue from cloud technology services—it becomes undeniable that they are each the proverbial 500 pound gorilla and each are completely capable of crushing most smaller competitors.”

“But,” he explains, “if you didn’t analyze their financials and uncover this information, you may not be aware that they’re a highly viable threat to any companies they perceive as competitors.”

Carver built the nearly $800 million dollar juggernaut, Harren Equity Partners, on this principle and believes it’s a core part of his success.

Look to your industry and beyond for both immediate and tangential risks

It goes without saying that you need to understand the risks your own industry faces, but economic turmoil means you need to look beyond that, deep into the other industries that yours depends on.

We saw the impact of this during the pandemic, when unprecedented lockdowns disrupted nearly every industry in a significant way. The worst part was that almost no one was prepared for the disruption this created.

Basically, what happened was that the lockdowns put a stranglehold on our supply chain, crippling most U.S. based businesses in some way. Manufacturers were unable to purchase the raw materials to produce their products, merchants were unable to get the products they sold in their stores, and entrepreneurs in all industries were unable to find a wide variety of products and services they needed to run the day to day operations for their businesses. The entire business community was turned upside down.

While there is likely no way to completely eliminate this threat, there are ways to reduce its impact. Many homebuilders, for example, are stocking up on building materials right now to prepare for price increases driven by trade wars and inflation. When prices skyrocket due to these factors, as has already happened during our last supply chain crisis just a few years ago, builders that took this proactive approach will have a significant advantage over their competitors who failed to do so because their operating costs and speed to market will be dramatically better.

This is just one example, and this same thinking can be applied to every industry that touches yours. Look at the legal industry’s involvement in your industry for signs of new laws, regulations, and standards likely to affect you in the future. Follow how technology is changing in ways that may dramatically alter how your business operates—Uber and the taxi industry is a perfect example of this.

You can even look at what institutional investors, like Blackrock, Vanguard, and Bridgewater, are doing for early warning signs. As Dr. David Phelps outlined in a recent article, “Smart money tends to move into specific sectors during economic uncertainty and the money managers behind these financial giants will focus on capital preservation rather than growth during times like these, so when you see them moving in a particular direction, you need to treat that like the canary in the coal mine.”

Carver shares another example, saying “I invest in a lot of businesses in the healthcare industry. I know that world inside and out, and I see risks there that others have never even considered. For instance, let’s say you have a great healthcare organization that’s growing rapidly because they have a business model that a lot of people love—but they start getting the attention of some of the larger hospitals because they’re now losing market share to this newer company.

On paper, it seems like investing in that scrappy little company is going to generate massive returns for you, but there’s a landmine in your path that most investors aren’t aware of. It’s a nursing shortage, which has plagued the healthcare industry for years, and will be a significant challenge for years to come. These larger hospitals have the cash flow to hire more of the available nurses in their market, and could even go as far as poaching current employees from their younger and more agile competitors. This has the potential to cut their growth off at the knees, and in the process, tank it as a viable investing opportunity.”

He emphasizes that you need to be intimately aware of what’s going on in any industry you invest in to spot the subtle, but often significant details that most will overlook.

It’s important to point out that you will almost certainly have blinders on in this exercise, due to your own personal biases, so it’s a smart move to get outside your bubble and think outside the box.

Look for potential worst-case or black swan type events

Admittedly, this one is a lot tougher to prepare for because what you’re looking for is so rare, you may see a black swan event once in a lifetime. The 2020 pandemic is one example, the 2008 housing collapse is another, and the stock market crash of 1920 is one that almost everyone is familiar with.

These are significant events that tend to impact a particular segment of the market in a negatively transformative way, and will often have a profound effect on the industries operating in their periphery. Think of this like a perfect storm scenario where a culmination of often unconnected factors together devastate an industry, and the damage often lasts for years beyond the initial impact.

The AI revolution is one example of a potentially looming black swan event, particularly in light of Google’s activities in the space over the last several years and the impact it’s having on publishers.

If you haven’t been keeping up with this story, essentially, Google has transitioned from being a tool people use to find the information they need into the source of that information, and the search giant is doing that by stealing content created by millions of small publishers and serving it up as its own. However, Google is only part of the equation here, because with the proliferation of AI, more companies will be engaged in this type of behavior. It could spell the end of the traditional publishing model as we know it, upending an entire industry.

This could create two separate dynamics. This first and most obvious is that it introduces tremendous volatility and an overall decline into the publishing industry. Companies large and small could disappear virtually overnight, and countless companies that serve them could face a similar fate.

But the second is the opportunity it could create, because a company that evolves to be competitive in this new environment could acquire several of these collapsing publishers at a deep discount to leverage their existing brand equity and audience in a new business model.

My point is that we need to first be prepared for potential black swan events because they can result in tremendous losses, but we also need to sift through the proverbial ashes from these events to find those homerun investing opportunities that typically only come up in the aftermath.

Deb Allen-Burger is an investor, real estate developer, licensed realtor, and a leadership coach for driven professionals in the real estate and financial industries, through her consulting firm, Arch Designs.