The 3 Phases of Your Financial Life—Where Are You?

In This Article

How often do you ask the big questions of life?

Why am I here? What was I put on the planet to do? Who ate the Outback leftovers that I clearly marked in the company fridge? Semi-boneless ham—does it have a bone or not?

This article deals with some weighty life and investing issues. I came across this nifty chart from Visual Capitalist that got me thinking about the different phases of a real estate investor’s life. Let’s summarize the chart first, then we’ll see how we could apply this to real estate. And to you.

The Stages

You can see that this chart breaks the investor’s lifestyle into three phases:

1. The Accumulation Stage
2. The Preparation Stage
3. The Retirement Stage

Stage 1: Accumulation

This is the early stage of an investor’s career, approximately age 20 to 35. With a long time until retirement, these investors can afford to take a lot of risks. They have time to recover from mistakes. Time and natural inflation will usually fix the short-term volatility that comes from investing in stocks and other assets that fluctuate wildly in the short term. Investors are told to focus on capital gains to build the value of their portfolio.

As serial entrepreneur and Harvard case study contributor Wade Myers told my then-23-year-old business partner, “Take your risks while you’re young. It is okay to mess up now before you have a mortgage, a spouse, and kids to support. If you’re going to swing for the fences, I would do it sooner than later. It will be much harder—and riskier—later.”

Stage 2: Preparation

This is a long stage from about age 35 to 60. Investors in this stage are “preparing” for retirement. They are accumulating, investing, and spending a lot. Financial planners recommend those in this phase dial back risk and balance their portfolio with more predictable assets like investment-grade bonds.

Stage 3: Retirement

At 60+, investors are supposed to be set up to enjoy the rest of their lives. The top priority is not losing money. (Note that this has always been Buffett’s top priority. I wonder what we can learn from that?) With a portfolio that is limited to equities and weighted heavily toward fixed income and money market securities, investors are focused on cash flow and not outliving their income stream (longevity risk).

Investors need to account for dramatically higher medical expenses. And though financial planners have traditionally projected lower taxes after retirement, let’s be honest, someone is going to have to pay for the massive deficits we’ve run up. And I’m sorry to tell you that someone lives in your town. At your address. And mine. (Note that this issue, massive tax deductions, is one of the major reasons you should be investing in real estate).

Speaking of which…

How do the Stages Apply to Real Estate

There is no right answer to this question. There are probably as many answers as there are real estate investors. But as someone in their third decade as a real estate investor, I’m hoping to offer some thoughts and reflections from my history and the experiences of hundreds of others I’ve interacted with on BiggerPockets and elsewhere.

Please note that I’m not using the age ranges tagged in the chart because the REI stages don’t need to last decades as they describe. I know many of you didn’t start investing in real estate until you were much older. That’s okay. Start where you are now. I didn’t make my first RE investment until I was 36.

1. Real estate accumulation

This is the time to build the value of your portfolio. It’s the time to learn a lot, to see what you’re good at, to build a team, and to be mentored and coached. You will probably have more time than money in this stage, and you should consider risking this time (your most valuable asset in every stage) to learn all you can.

Though this will vary based on what you want to do in the long run, here are some potentially great real estate (and general) strategies to consider during this stage. This is far from an exhaustive list.

• Wholesaling homes and other properties (very time-intensive but little capital needed).
• Wholesaling lease options.
• Acquiring homes “subject to” the seller’s mortgage to build a rental portfolio with little to no money down and no debt in your name.
• Lease option sandwiches or wraparound mortgages. This consists of acquiring a “subject to” home and doing a lease-to-own to a tenant-buyer.
• House hack. Craig Curelop has an amazing book on this topic.
• Flip homes on a one-off basis.
• Build a rental home portfolio. Use the BRRRR method to hold homes and grow your portfolio.
• Coaching and/or mentoring. For all, but especially if you want to get into larger commercial deals.
• Partner with more experienced investors. Consider trading your time to gain a window into their experience.
• Experiment with high-risk strategies. This is the time to make mistakes.

Though this happens occasionally, it is probably not the stage to plant your final victory flag. You may well emerge from this stage with some confusion about what you really want to do in your investing life. I know I did. Though this may discourage you, I didn’t ultimately figure out what I wanted to do until I hit my 50s.

2. Real estate preparation

This is the time to evaluate what you learned in the first stage and implement it to grow your portfolio and your company. This is the time to take the skills, knowledge, team, capital, debt capacity, and more to really kick your REI career into gear. This could be the time to move up from employee to self-employed and/or from self-employment to running your own company, where you’ll leverage others’ time, talents, and capital.

Once again, there are many different paths to follow and a lot of overlap from above, but here are some ideas to consider.

• Consider moving from flipping or wholesaling to buy-and-hold rentals.
• Learn to syndicate to leverage OPM (other people’s money).
• Partner with someone from your coaching/mentoring group. (Be a star student and partner with the coach!)
• Share your knowledge and build your following, then raise capital to do bigger deals.
• Consider moving from single-family to multifamily (it is generally easier to manage a hundred doors under one roof than spread out all over town).
• Consider moving from residential real estate to commercial. Many investors are branching out into self-storage, mobile home parks, senior living, and more.

3. Real estate retirement

This is the time to move from active to passive real estate investing. You’ve climbed the ladder. You’ve gone from leveraging your time and dollars to leveraging other people’s time and dollars. You’ve gone from employee to self-employed or even to business owner.

Now it’s time to put your dollars to work. Like a farmer who plants tiny seeds and reaps a massive harvest, you will be planting the dollars you’ve earned into the ground of other active investors and their projects. Though the following list is more strategic than tactical in nature, I hope it is helpful as you consider this potentially fulfilling and profitable stage of life.

• Leverage your wisdom in knowing who to invest with and what to invest in.
• Leverage your understanding of and history of certain asset types to ask the right questions and carefully “plant” your dollars.
• Draw on decades of seasoned relationships to get the help and advice you need.
• Take advantage of the painful lessons you learned along the way and know what pitfalls to avoid. (I have a podcast called How to Lose Money, and we have not interviewed anyone who achieved great success without painful failures along the road.)
• Know what hard questions to ask to vet a great sponsor and a great deal.
• Know what questions to ask when things are going wrong.
• You should be in a position to help bail out your syndicator’s sinking ship through counsel (even if you didn’t cause the problem).
• Value preserving capital more than growing it. You will naturally follow Warren Buffett’s #1 rule of investing.
• Learn to say no far more often than yes.
• Value focus and the joy in overcoming the temptation to chase shiny objects.
• Appreciate the value of giving back and mentoring the next generation more than the value of making the next dollar.
• Read the new Brian Burke book called The Hands-Off Investor and apply its many lessons in everything you do. (I’m not just trying to do an ad for a BP book. I think this book is critical for anyone who wants to invest passively.)
• Have a big “why” where you passionately invest your time, talent, and treasure. Mine includes fighting human trafficking and rescuing its victims.

Now What?

I want to remind you that this is a very general overview of a topic that needs laser specificity. The missing ingredient here is you.

You need to bring your life, your goals, your context, and your dreams to this table and see how this analysis could fit in. I hope it brings some clarity and sparks some ideas.

Speaking of clarity, my friend Mike Dymski shared this quote from Tom Bilyeu: “Clarity requires you to know more than just what you want the end result to be. It means that you know the exact steps you need to take right now, tomorrow, next week, and throughout the month to get closer to achieving that dream.”

What phase are you in and how are you going to move to the next?

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.