Why I Believe Many Investors Have the Wrong Goals

Question

It’s my opinion that many investors have the wrong mindset when it comes to real estate investing.  This is evident when they express their goal as “ I want to own enough real estate to provide me a $10,000 per month income to replace my salary”.  While financial independence is a worthy goal, defining it this way leads to investing that’s (1) too restrictive , (2) too heavily emphasized on cash flow and (3) too heavily reliant on only one way to achieve financial independence.

I always stated my goal as “ I want to have an investable net worth of $x in 5 years while utilizing a maximum of 50% leverage. This allows for a wide variety of ways to achieve the goal thru all aspects of real estate; investing in assets that have great capital gains potential but may not cash flow (options, land, redevelopment, gentrification, etc. ) utilizing “fee income” to build my estate (syndication, brokerage, partials, participations), and “creating” high yielding notes, and “creating” wealth through creative real estate buying, selling and exchanging.

I’m a firm believer in that before one masters any creative or wealth building strategy in real estate investing, they need to master three things; (1) real estate PRINCIPLES, (2) real estate LAW, (3) real estate FINANCE. Once the investor understands these three FOUNDATIONAL aspects of real estate investing, they can comprehend the creative and wealth building techniques and strategies and successfully apply them to individual deals. It is precisely because of mentoring programs that teach strategies and techniques to people who do not have any grasp of the three afore mentioned fundamentals that we have such a mess with “wholesaling” and “subject to” that governmental authorities are figuring ways to heavily regulate or outright ban these activities in the residential real estate field.

Let us know what you think.  What are or were your goals in real estate? Have you achieved them? Or are you on the path to achieving those goals?

Scott Trench · Answer

This got out of hand a few years ago. There was a thread going that asked if folks would rather have:

- A $3M equity portfolio that produced breakeven cash flow.

- A $1M equity portfolio that produced $15K per month.

Many people chose the second option.

Another way of phrasing the question is:

“Would you rather have $3M or $1M?”

Jay Hinrichs · Answer

retiring on cash flow is a pretty tough thing to do for most folks full stop.

to me to do that its highly dependent on your location and price points.

And how much capital you have to start with and or your day job to allow you to scale.

On wholesaling that is just transactional real estate with income that is taxed at the highest level and to be successful at it one needs partners or access to pretty decent amount of start up money to afford the marketing it takes to get your leads. Most simply don't have it and or also have very limited sales and closings skills ..

For wealth generation to me its all about appreciation organic or forced. Especially in high priced markets were married couple gets that 500k tax free.. do that a few times in your life that will make you more money than most rentals at 200.00 a month cash flow. And managing your own owner occ la bode is far eaiser :)

Don Konipol · Answer

This is exactly the type of reasoning I do not agree with.  LOL.

Of course, your opinion is just as valid as mine, and if it works for you, that's all well and good.

True, you definitely do NOT want to give up a 3% loan....BUT there are numerous CREATIVE ways to build net worth FASTER than hold and reinvest cash flow.  My focus when I say concentrate on net worth is to be open to the possibilities.  For example, let's say you find a great deal but don't have the  cash to make it happen.  You could borrow a second against the $400k of equity in your property - and accept short term negative cash flow to earn a lot more on the great deal you don't want to pass up.  You can create a second lien against same property, and substitute it for a down payment on the property you want to buy.  You can sell the property utilizing a wrap note, with the note at 10% interest and earn 10% on your equity and 7% on the amount of the note.  If the note is 50% that's a 17% note you just created.  Further, you should be able to sell the property for 10-20% ABOVE cash sale value because you're providing owner financing.  You can exchange your property for a larger property and build your net worth faster through greater appreciation (because of higher starting value) and greater amortization.

I have personally utilized numerous creative strategies and techniques to accelerate my wealth, while still making judicious use of leverage to provide a reasonable margin of safety with each deal and a very strong margin of safety for my portfolio as a whole.  And I made most use of these "wealth accelerating' techniques when I had little capital and was in the initial stages of investing.

There's nothing wrong with buy and hold for cash flow, but I believe strongly that with enough knowledge and experience, one can accelerate and enhance building an estate utilizing "creative" strategies, all without taking undo risks.

Mike Dymski · Answer

Most, if not all, of the $10K per month posts come from people who have not purchased a property yet.  It's a wish rather than an informed goal.

I find it better to focus on systems/actions (analyze X properties, offer on Y, close on Z).

JD Martin · Answer

I had no goals when I started other than finding a non-stock market investment that would pay better than anything at the bank. I picked RE because I had a lot of practical knowledge and experience that I thought I could leverage to add value to my purchases. I already had a decent job with a future pension, and no thoughts of living off of cash flow. So I reinvested everything back into the business until I found myself with a nice fleet of rental homes, some fully paid off and others with minimal leverage. One day I noticed my rental properties produced significantly more cash flow than my W2, and since I was at retirement age for my pension and the state was screwing me on my time, I was able to take my retirement pension and live (hopefully) happily ever after 😅

John Morgan · Answer

I’m one of those investors that had a goal of 10k/month cash flow. lol. I was clueless when I started 9 years ago and didn’t really have any strategies. I just kept recycling the equity to scale up without using any of my own money. It took me 6 years to hit 10k/month net cash flow. Much faster than I thought. I’m at 17k/month now with 27 SFR. Some of us just sort of wing it and ok with cash flowing in random ways without a plan. If I see a deal, I find ways to borrow money and snag it. I’m usually taking out 0% interest for a year credit card loans or 401k loans to find the cash. Then pay them off with the cash flow. Pretty simple strategy, but it works for me. RE definitely isn’t rocket science and anyone can get very wealthy off it if they just give themselves 5-10 years. My “base hits” are paying off finally. They definitely weren’t home runs for at least the first 3-5 years. lol. Patience is key!

Gregory Schwartz · Answer

Well said.

One of the best pieces of advice I heard years ago on a podcast was from a gentleman worth $100+ million. He said, "Start tracking your net worth now." I took that to heart in 2016, and since then, my net worth has been my primary financial KPI.

Don Konipol · Answer

@Jay Hinrichs

“And managing your own owner occ la bode is far eaiser :)”

I don’t know Jay, apparently you never met either of my ex wives!

Henry Lazerow · Answer

Cashflow increases your lifestyle. If you already have a high net worth or a high enough salary then you can focus more on equity plays. I think the bulk of BP members are not high networth so cashflow is their number 1 priority. It's also hard to access that equity unless you have enough properties to sell one off every few years, cash out refi do not always work for example I have a 4 unit its got like $400k equity but if I cash out refi it then it would no longer cashflow so the money is just stuck in there the old mortgage is at 3% so I won't ever refi it anyways.

V.G Jason · Answer

Agree, I never went after things for X or Y amounts. It's all about systems, and see where it takes you. Too many variables in life force change.

Why I Believe Many Investors Have the Wrong Goals

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