Stop Chasing Strategies and Follow Investment Principles

December 11, 2012 — Leave a comment

A big mistake investors make is that they get so caught up with the newest and latest strategies that they run in too many directions and lose focus. Strategies are important but in order to succeed, your strategies must be aligned with your Investment Principle.

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Principle is defined as a fundamental law or truth from which others are derived. In order to build a stable foundation and stay out of trouble it’s important that you create an investment principle that you follow. Creating an investment principle helps you focus and follow a specific path towards success.

For example, my investment principle from day one has been: Invest In Cashflow. Sticking to my investment principle helps me identify which deals to look at further and which ones to ignore. If a deal will not produce positive cashflow I won’t even waste my time and energy looking at it because it isn’t aligned with my investment principle.

When I first started investing , I was living in NYC and because I was clear on my investment principle I knew I was not going to be investing in NYC because prices were very high compared to rents to produce the positive cashflow. I then started looking into other markets where I could find income producing properties. It is because of this investment principle that I survived the real estate crash when many so called real estate investors went bankrupt. This investment principle has allowed me to create passive income and wealth in both an up and a down market.

Strategy is defined as a plan, method or series of maneuvers for obtaining a specific goal. Once you are clear on your investment principle you now can choose strategies that are aligned with your principle. Although I am primarily a buy and hold investor, the advantage to investing in cashflow is that it gives you numerous exit strategies to choose from.

Buy & Hold – My primary purpose for investing in real estate is to create wealth and passive income and investing in cashflow real estate allows me to achieve these goals.

Wholesaling – This should be a last resort because although it is risk free and a quicker way to make money, it’s typically considered earned income so you are taxed at your ordinary tax rate and subject to self employment tax. But, income producing assets are always in demand, even if the property needs some renovations to get it into rent-able condition. What makes wholesaling so appealing is that you can make some nice cash with putting a small deposit down and not putting that money at risk due to the contingencies you include in the agreement of sale. As a result, you can wholesale a property to another investor to make some quick cash, but make sure you are aware of your tax bill on the transaction.

Flipping – Similarly, investors are always looking for income producing assets. Since I have taken the time to acquire and renovate the property and have filled it with tenants, the property cashflows from the moment the end buyer purchases the property. Because I have made this investment turn key for the end buyer they are willing to pay retail price because of the passive income and tax benefits they receive from this property. If you chose to flip you want to make sure that you are holding the property for over a year so it is considered long term capital gains or you may want to look into doing a 1031 exchange to defer paying taxes now. In addition, if flipping becomes your full time job, this income can then be taxed at your ordinary tax rate and be subject to self employment tax.

There is no right or wrong answer for the investment principle that you chose. I personally chose investing in cashflow because focusing on cashflow allows me the flexibility to invest for not only cashflow but also for capital gains.

dougfath

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