4 Revealing Questions to Help Develop Your Investment Philosophy
It has taken me a while to figure it out, but I have come to the realization that having an investment philosophy is hugely important. Like just about everyone else in the world, I had heard a lot of talk about “philosophy” and “principles” and other “big picture” words. They didn’t mean a whole lot to me though, and so I just paid them the usual lip service and went back to running around like a chicken with its head cut off.
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You can look up the dictionary definition of “philosophy,” and you would find something similar to the definition I ripped from Merriam-Webster below:
“A theory underlying or regarding a sphere of activity or thought.”
The first time I read that sentence, I don’t think I understood a single word of it. I had to reread the definition a number of times just to clear the cobwebs from my brain. The fact that the definition uses the word “or” twice only serves to complicate things even more – “So there are multiple possible outcomes now?” I thought to myself. Words don’t mean a lot to me unless they are accompanied by experience. I have been investing in real estate for myself for over four years now, and only in the past month have I really started to nail down what my philosophy truly is.
I read the definition above now, and the word that draws my focus is “theory.” The natural progression is to ask myself what my theory is… on life, on relationships, and on real estate. There was a point in life when my theories, however underdeveloped, on life, relationships, and real estate were segmented and unrelated. However, since quitting my full-time real estate job a year ago, the three have started to marry up. That is really frightening for me.
There was some comfort in knowing that even if my theory on relationships was wrong, at least I had my theory on real estate. The fact that my theories are starting to comingle removes that mindset. Despite the fear, honing in on my philosophy is also empowering. I feel as if the responsibility to succeed and live a meaningful life truly is in my hands – and that is part of my philosophy. Instead of hoping to have one successful theory in one aspect, whether it be life, relationships, or real estate, I now realize that it is important to me to have all aspects of my life complement each other.
I won’t pretend to have everything figured out – not by a long shot. Neither will I be arrogant enough to try and prescribe how you should live your life, find your philosophy on investing, or approach your investment goals. I’m only capable of sharing with you how I constantly refine my own philosophy and why that matters to me. Below are four questions that I try to ask myself on a consistent basis.
4 Questions Necessary to Develop Your Investment Philosophy
1. How much money is enough for me to retire?
There are financial planners who have metrics that help people determine how much savings they need to live a certain lifestyle. They factor in for inflation, all your expenses, and any residual income you may have. It may seem like a ludicrous question to ask yourself at twenty-three (like I did when I first started) because there is so much uncertainty. Heck, at twenty-three most people are asking themselves what they want to do with their lives. However, I think it can sometimes be helpful to ask how much money is "enough" before you go off and decide what you want to do with your life. Yes, I know that most people disagree with this… but most people also will work until they're sixty-five and collect a meager social security check — if that's even a thing thirty years from now.
I’m not advocating for you to forego a lifelong passion in the pursuit of cash riches, but I do think it’s important to understand how important money is to you. For me, I have always known that I want to own real estate, and so I don’t look at it in terms of how many millions of dollars are in my bank account, nor how much my assets are “worth.” Instead, I look at how much dependable cash flow I get every month from my real estate investments.
When I first asked myself this question at the age of twenty-three the answer was “five thousand dollars per month… on average.” I told that to a girlfriend once, and I’m confident it is one of the reasons she broke up with me. Such is the reality when dating rich “Marina Girls.” Retire meant something a bit different than it does now. I was doing flips at the time and was happy with the big, but inconsistent, checks from flips. At twenty-three I just wanted to cover my expenses so I could drink and have a cool place to live. Four years later my theories on life and relationships have changed… well, at least a little bit!
I want to retire and coach high school basketball. I want to be able to provide for a family and live in the San Francisco Bay Area. Thus, my philosophy of real estate investing has changed a bit. Instead of needing five thousand dollars per month, I now need at least five times that. It may sound like I’m just getting greedier, which may be true, but the point I’m trying to make is that my philosophy has been adjusted. I’ve realized that doing flips will no longer cut it for me because I need more consistent income for a family to rely on me. Instead I have started to focus on income-producing apartment deals. Not as sexy as getting a big check every few months when a flip closes, but more conducive to creating residual wealth.
There is no right amount, nor a right way to get your investment goals. Everything can change, but knowing what your money goal is helps define your real estate philosophy, which helps you decide on what type of properties to invest in.
2. Who do I want my business partners to be?
Partners are less important when they are only your partners for a few months. The average time it took to flip a house when I was twenty-three was around 80 days. I wasn’t so worried about whom my partners were long-term (although I was lucky and had great ones), but I would have worked with just about anyone who I believed would make me a bunch of money.
My investment philosophy is different now — I want deals that I could hold for a decade or more. Thus, it is important for me to have the right business partners. The number one thing is to have people I trust. Things always go wrong in real estate; they just do. It’s how you deal with those things that matters. I want business partners who are reasonable and fair. Are they looking to blame someone when there is an issue? Or do they just find a solution and move on?
I have also set higher goals for myself (no longer is $5,000 a month the pinnacle) and thus need to be more strategic about who I align myself with. I want people who are going to add value, make me smarter, and potentially bring other deals to the table. There is a definite opportunity cost of working with someone who is a bad partner — they drain your energy, suck your resources, and wither your soul! OK, that may be a bit of an exaggeration. The point is that I have become more mindful of the bigger picture instead of chasing an easy buck with the wrong guy.
3. How do I focus?
My tendency at twenty-three was to say yes to everything, and then try to do every single thing, all at once. It worked out in the sense that I got a lot of experience, but it wasn’t so helpful in terms of maximizing the amount of money I made.
My philosophy was that I wanted to have my hand in everything. "Make a little here… a little there…" and so on. I ended up missing out on fully capitalizing on a once in a lifetime investment opportunity when the housing crash struck in 2008. Yes, I made money owning some rentals, doing some flips, working for a large real estate investment trust (REIT), doing renovations, helping with property management, starting an app to help manage renovations, and starting blogging about all of it. However, if I had just focused on buying and owning single-family rentals for myself, I would have been a multi-multi-millionaire, and instead of writing this post in my office, I would be writing on a sandy beach with a Corona in hand…
Coulda, woulda, shoulda… doesn’t mean a whole lot going forward unless I learn from it. My real estate investment philosophy has been focused over time, and the best tool is to simply ask myself, “How do I focus?” I started charting out how many hours I wanted to spend on the seven billion items on my to do list and realized that there literally wasn’t enough time in the day, the week, or even the year! I started prioritizing and cutting things from my list (really just telling myself that I would pick them up later.)
Ultimately I realized that by thinking about business partners, relationships, and how much money I needed to retire, I was narrowing down (focusing) on what really mattered to me. I realized that it wasn’t so much about the dollars, or the people, or getting “things” done. It was about living the life I wanted to live. I quit my job without a very tangible big picture plan — but it felt right. The other question I kept asking myself was:
4. What do I have to lose?
The answer is nothing. The real risk is not attempting to go for my dreams and financial goals. The real risk is waking up at sixty-five and realizing that I didn’t have a philosophy or ever take my shot. This question underrides my entire life philosophy — whether it be with relationships, money, passion, or real estate, go for it! And go for it NOW!
My real estate investment philosophy is to buy long-term hold apartment buildings with people I trust, to create as much residual income as I can, and to do it in the next five years.
What is your investment philosophy? How about your philosophy on life? Does this type of mental exercise help you?
Leave me a comment below, and let’s discuss!