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

Question

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?

Bjorn Ahlblad · Answer

@Don Konipol Happy New Year! I am stage 3+. At 77 we have enough doors to last us to expiration and turn it all over to our kids who will hopefully preserve some and enjoy the rest in whatever way they choose. We have already started gifting to them and hope to leave here the same way we came in. It has been a great ride!

John Morgan · Answer

I’m 52 years old and have been investing for 8 years. It started out as a hobby, but I somehow ended up with 17 SFR. I acquired most of them from using equity from rentals or my primary house  to buy more and more from cash out refis. I was able to retire my wife last May since our rental income was about 3x’s what her nursing job paid. I’m a little over leveraged and don’t have enough in emergency savings now. So I’m going to quit buying rentals and focus on ramping up my savings and enjoy life. My wife said no more rentals, so I better listen and find a new hobby. Lol

Joe Archbold · Answer

Great question Don,

For me its 2 & 3. I own/ manage my own multifamily assets in my market and invest passively in R/E syndications with highly experienced operator in both single assets and Funds. I can add additional passive income, leverage their expertise, and diversify my holdings.

As these are cash flowing asset with highly experienced operators, I am not focused on capital preservation. I am more focused on generating some income with some assets and larger equity event based payout with others.

Jeff S. · Answer

@Don Konipol interesting question. I am fully in stage 3 wanting an enjoyable life without the added stress of additional rentals or remodels. I am at 70 too and really looking for enjoyment, not life shortening activities dealing with governments and the threat of a reduction of liquidity. I am in the giving back stage. Biggest job now is upgrading what I have and using autopilot as much as possible.

Jay Hinrichs · Answer

I fund the wild men stage one guys.. which makes my ride interesting.

mid 60s  still working hard  most of our assets are paid for.. with the exception of our building projects but those are only levered to about 50 to 55%

As investors and especially private money lender type activity we do . thats something we will do as long as we are mentally capable. We dont advertise and we only work with a select group.. but I really dig helping these 20 to 30 year olds grow their wealth its fun and I enjoy the travel and

business dinners with them in their respective cities. I like to kick the dirt as it were.  Been a wild ride though thats for sure.

Just like this year when i thought shit i finally got it nailed the fed does what it did and now sales are slow so longer time line to get through this last big project.. We have some very long term options on some very valuable dirt that we are starting to get some play on.. hope to be alive when those come through other wise my kids are in for one heck of an inheritance.

John McKee · Answer

I've always been in the same stage for the last 17 years which is slow and steady accumulation of stage 3 assets.  The NNN assets I buy are low risk and not over levered.  I'm never looking for that home run scenario as I'm comfortable with hitting a bunch of singles.  I can live off my investments at the age of 53, but I actually enjoy looking for that next property and helping others do the same.  My financial goals are to keep acquiring.  The risk I'm willing to take is in line with the banks of 25-30% down and 1.2 DSCR.  To limit loss I make sure that I buy in the right location.

Eric James · Answer

Don't know if those stages apply to me. I've never taken high risks. I only buy when I can get 20-30% equity through value add, so risk is minimal. I started with BRRR sfh but have started building small apartment buildings with my own crew. Still get 30% equity above cost.

Drew C Grossman · Answer

@Don Konipol  This is an interesting question and I really enjoyed reading everyone’s responses

I’ll be the first one here to own “stage #1” and break the ice!…Someone had to do it…however I relate more to the first half of your description vs the latter!

I am in my early twenties…little family responsibilities (yet)….relatively low net worth (compared to some of the guys in this thread lol) and I can certainly afford to take more risk …and “chase higher returns”

BUT with that being said….regarding my willingness to “roll the dice”…..since we are talking gambling….I like to look at it a little differently in that I’m placing an asymmetric “bet”. What I mean by that is my potential upside is greater than its downside

This is how I’ve been buying real estate up to this point and it’s been successful for what I want to get out of it!

I feel I am well capitalized, levered under 35% on the portfolio……..Even with little leverage, I have achieved 20%+ cash on cash average and forced a substantial amount of equity and wealth creation…greater upside than my downside. It’s obviously easier said than done …..My goals are to buy 1-2 properties a year for the next 5 years in which case I will re assess where I am at!

Like many of you here already said…when it’s my time down the road I hope to be able to leave my family with what I built for them

Joe S. · Answer

Don I always enjoyed reading your post. Didn’t know you were 70, but it’s starting to look younger every year lol. The way you described phase 1 people would be nervous to claim that was them. There’s a lot of verbal chastising on Bigger Pockets geared toward those that are seen as over leveraging.

Alexander Szikla · Answer

Some people stay in one stage and just scale up their bets too.

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

Contact Us

Most Popular Reply