Talking with real estate investors every day, I hear many different investment objectives and strategies. Even thought there is a plethora of different investing techniques, they can easily be categorized into 2 basic investing groups.
The active investments and the passive investments.
Attending many real estate investment groups, I am always interested by the debates going back and forth between the two investment styles.
Wow! People are so passionate about what they invest in that they believe if you have a different investment style you are missing the opportunities. I think this is why many investors struggle to find their investing niche, because they do not know what to believe.
What is the best investment strategy today
Every day I am asked by investors what is the best investment strategy today. Should I fix and flip or wholesale property or focus on buy and hold rentals or what. I believe that there is not right or wrong way to invest as long as you are purposeful and perfect the niches that interest you.
My reply of course is often met with a glazed look on their face as they are looking for more direction. I suggest they look at the 5 wealth building principles and then they can create the clarity as to what type of investments they may want to participate in.
The 5 wealth building principles are spelled out in the acronym. I.D.E.A.L.
I = Income: this is your monthly (positive) cash flow.
D = Deductions: this is a forgotten benefit that the seasoned investors capitalize on very well. Tax benefits such as deductions and appreciation help you to preserve the most amount of money. As the successful investors will tell you, it is not how much you make but rather how much you keep that is important!
E = Equity: Another forgotten and hidden benefit, when your tenant pays you rent and you use a portion of that to pay down the principal balance of the loan you are building your equity up each and every month. You now owe less and have more equity being reserved which you can realize the added benefit as you sell.
A = Appreciation: this is the value growth of the property (national average is 6% appreciation per year averaged out over the past 50 yrs).
L = Leverage: this is being able to control 100% of the investment with as little as only 20% of the value coming from you in the form of cash out of your pocket (typically 75-80%) of the money used to make the purchase can be financed.
Real Estate is the only IDEAL investment
After sharing these 5 wealth building principals, investors start to gain the clarity they seek. When evaluating their investment strategies all they have to do is to establish how many of the wealth building principals their investment strategies have and they can then decide if they are comfortable with the returns.
Investment strategies examples
Fix and flips: This strategy provides for 2 of the 5 wealth building principals. It does not allow for Income or Cash Flow during the fix and flip process. Deductions are really just limited to deducting all expenses from the total sale price to reduce your profits. Equity buildup does not occur either. Appreciation is this investments strongest attribute which comes from improving the condition of the property.
Leverage: is another strong attribute as often people will finance as much as 100% of purchase cost and repairs though a hard money loan.
Wholesaling: This strategy provides for 1 of the 5 wealth building principles. It does not allow for Income or Cash Flow during the process. Deductions are really just limited to deducting all expenses from the total sale price to reduce your profits. Equity Buildup does not occur either. Appreciation is this investments strongest attribute which comes from finding a buyer to pay you more than you did essentially for your hard work and diligence in finding the property. Leverage typically does not exist in Wholesaling as you are buying distress on more of a short term speculative nature.
Buy and Hold: This strategy provides for all 5 of the 5 wealth building principles just as illustrated above.
If you would like to talk about your I.D.E.A.L. real estate investing strategy, check out my Real Estate Investing Strategy Call!