WHICH “STAGE” OF REAL ESTATE INVESTING ARE YOU IN?

[Don Konipol]

I believe that there are 3 main “stages” of investing. Stage 1 is higher risk, aiming for high returns, wealth accumulation.  Young investors, with low net worths, few family responsibilities, and a willingness to “roll the dice” usually predominate the people in this stage.  They utilize maximum leverage; try for no money down acquisitions, try to accumulate as much real property as possible, and are willing to take on the risks of speculative deals for the possibilities of high returns.  I was in this stage in my late 20s through my late 30s.

Stage 2 is one where the investor, while still willing to consider some outsized risk for the shot at home run type returns, is more selective in choosing investments and less willing to utilize high LTV high cost loans without having a "reserve" of cash stashed away just in case. The investor might have accumulated net assets in the $250,000 - $2,000,000 range, and while asset preservation is not his predominant motivation, he has no desire to risk all, or even a major portion of his nestegg on a ‘deal gone wrong". Even in the worst situation he wants enough staying power to ride out any storm, while still being aggressive enough to multiply his net worth through investing. I was in this state in my late 30s through my early 60s.

Stage 3 can best be described as wealth preservation. Basically the investor in Stage 3 is most concerned with not losing money, rather than multiplying his wealth. A more sophisticated approach is to be concerned with wealth preservation accounting for inflation, so the investor wants his capital to at least keep pace with the declining value of the currency. Interest, dividends for "spendable" income become important; the investor may plan to or be spending his wealth and reducing his capital with an effort to enjoy everything money can buy while he's still alive. I have never fully entered this state; I consider myself perhaps 60% into stage 2 and 40% into Stage 3, as At 70 I am still attempting to increase my net worth, albeit with reduced risk and lots of downside protection. I've eliminated personal liability on any loans, keep even investments in passive participations to those utilizing no more than 50% LTV, and as a whole the leverage in my portfolio is less than 25%.

So my question is, what stage are you in, 1,2,3 or some combination.  What are your financial goals, how much risk are you willing to take, and what if anything do you do to limit the risk of loss?