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.
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.
Related: How to Be Smart in a World of Dumb Real Estate Professionals
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 …read more