Last week Jeff Brown, real estate investment advisor, explained quite a bit about the hows and whys of real estate invement. He described the process, the myths that get the way of most people enjoying a work-free retirement, and a positive way to respond to a bad market situation. I’m left with only one question.
All right Jeff. You’ve got my attention. But at the end of the day, I really have only one question. How do you make sure I don’t lose all of my money?
The short answer is thereÃ¢â¬â¢s no way I know of to make sure you donÃ¢â¬â¢t lose money. Losing all your money is something IÃ¢â¬â¢ve only heard about, and IÃ¢â¬â¢ve been doing this for close to four decades now. Be clear about this Ã¢â¬â nobody can ensure you donÃ¢â¬â¢t lose money when investing. ItÃ¢â¬â¢s simply not possible. And if someone tells you they can Ã¢â¬â run.
ItÃ¢â¬â¢s called risk capital for a reason.
That said, we do everything possible to see how far away from the cliffÃ¢â¬â¢s edge we can get. The idea after all is to go from point A to point B. Since retirement is most likely your point B, skirting the cliff is probably not appealing to you anyway. So what do we do to make investing as safe as possible?
First, we refuse to work with an investor who wonÃ¢â¬â¢t have a reserve account. (Remember Sominex?) There are very few exceptions to this rule. The most recent was a man who has consistently earned over $30K a month for the last eight years. A bill for $900 isnÃ¢â¬â¢t going to ruin his day.
This reserve account is abundant in nature. Typically for a client who spends $100K to acquire 3-4 properties, a reserve account should be at least $30K — at least. We find ways for the client to make this happen.
The lionÃ¢â¬â¢s share of your capitalÃ¢â¬â¢s security is established through the solid research done by either you or your advisor. How reliable is your conclusion that the area you like is really poised for long-term growth? Is the professional property management firm you found really as good as Uncle Farley said? Do you have reliable and experienced inspectors lined up? And how experienced is your lender? Many lenders will say they know investments, but most couldnÃ¢â¬â¢t find a solid investment loan with two helpers and a GPS. Do they even know what the right loan is for you and this particular property?
How about he subtle nuances of making the rental units appealing to prospective tenants Ã¢â¬â without breaking the bank to do so? Are you a softie? When tenants stop paying, and trust me, no matter how fine the filter, you will have bad tenants — what will you do? Let them stay for three more rentless months, or evict them and cut your losses?
This question goes to the root of the #1 axiom of investing: First protect the capital Ã¢â¬â THEN protect the return on the capital.
Solid research, having the right pros in place, and ensuring an abundant Sominex account before you even begin, will go a very long way to helping you avoid the loss of your capital. Being consistently involved, or at least in the loop, will be a key.
Finally, IÃ¢â¬â¢ll quote one of my favorite people, Warren Buffet. He was responding to a question referring to the strategy of diversification. In short, that strategy has the investorÃ¢â¬â¢s capital in opposing investments. For instance, if stocks go one way, bonds usually go the other. So the principle of diversification puts some money in both. HereÃ¢â¬â¢s what Mr. Buffet had to say about that:
Ã¢â¬ÅDiversification is for people who donÃ¢â¬â¢t know what theyÃ¢â¬â¢re doing.Ã¢â¬Â
Know exactly what youÃ¢â¬â¢re doing and why. ItÃ¢â¬â¢s your capitalÃ¢â¬â¢s best protection. If you donÃ¢â¬â¢t know, and donÃ¢â¬â¢t have time to learn it all, then find an experienced advisor.
“Know what you’re doing.” I feel like I know a WHOLE lot more now.
Thank you, Mr. Brown. You’ve made us all more prepared.
Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.
Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.
–ME “Liz” Strauss
Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.