Do You Want Control?

Most investors in the stock market complain about the lack of control. The value of many stocks is driven by technical factors. Volatility is so commonplace that it's now expected.

The past 6 years have reminded many investors that real estate markets can be cyclical. The meltdown in US real estate was hugely disruptive and many investors who were too highly leveraged lost money or were forced into foreclosure. The fundamentals of investing are well known:

• Buy low - sell high
• Cash is king
• Don't borrow too much
• Buy value

So what do these platitudes really mean?

Buy Low Sell High
I see investors buying at fair market value, and then hoping market appreciation will result in a profit. It is true that over the long haul, prices do tend to increase. It is also true that the inflation adjusted increase is much lower. We don't really make quite as much money as it appears on paper. In my business, I buy properties at a deep discount to the current market conditions. If I change my mind about an investment, I can sell it the next day and still make a profit.

Cash is King
All projects have risk. All properties require maintenance. I see too many investors raise only the cash they need to purchase a property and complete the renovation. If anything goes wrong, they don't have the cash reserves to withstand the "normal" set of problems that can arise in any project.

Don't Borrow Too Much

This is similar to Cash is King. There's nothing wrong with borrowing a lot, as long as you don't leave yourself over-extended. This requires discipline. Keeping cash reserves is the key to maintaining a strong financial position. When a problem arises, you have the financial strength to deal with the issue. I'm a firm believer that problems arise when cash gets starved. Normal problems can be handled easily with healthy cash reserves.

Buy Value

This can mean different things to different people. For some, it means buying at a deep discount to the current market conditions. This is a perfectly legitimate stance to take. In truth, there are many opportunities to buy at a discount. However, in high demand markets, these opportunities are more rare. In those cases, you need to create the value, rather than hoping to find it lurking beneath an unturned stone. I come from the school of forced appreciation. I believe that most good deals are created, not found. In my business, I focus on value creation.