All Forum Posts by: Jeremy Bottlinger

Quote from @Tony Kim:

Quote from @Jeremy Bottlinger:

Quote from @Tony Kim:

Quote from @Jeremy Bottlinger:

As part of my ideology that education should be free, I will be making a monthly post (if not more often) related to real estate, because a better educated society results in better social and economic opportunities for those members of that society. I would gladly pay more in taxes to allow everyone an opportunity for free education. With that being said, I do NOT believe in loan forgiveness. That doesn't solve the problem with our education system, which is the astronomical cost of education nowadays. The topic may be a short definition, quick walk-through of a transaction, or an in-depth discussion on a technique or principal.

DISCLAIMER: For every question in the world - other than math - the answer is “it depends”. It depends on you and the facts/circumstances of your situation. I will provide as much information as possible to help you understand the topic in order for you to make an informed decision. In some posts, I will refer to books, articles, and studies. I DO NOT receive any commissions for those referrals. I will explicitly call out any instances that I receive a referral commission including the amount, so that you can evaluate for any bias.

TODAY'S POST - You are an Investor

Before I get started, here are some books that I think discuss various principles of investing succinctly, effectively, and in layman's terms:

• The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness https://g.co/kgs/CYYdDN

• Market Wizards https://g.co/kgs/Zea8oW

• Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude https://g.co/kgs/dfnZcm

• The Psychology of Investing https://g.co/kgs/a4mXqU

Yes, some of those are geared more towards traditional investing - stocks, bonds, futures - but the underlying concepts are still applicable to real estate (RE) investing.

Being the owner of rental properties makes you an investor; therefore, you need to ensure you understand the principles of investing. I refer to them as the 4 P's: Patience, Preservation of capital, imPerfection, and Paying yourself.

Patience: Warren Buffett has a great analogy for discussing the importance of patience. He compares investing to being a batter in the batter’s box but the difference is that investors have an unlimited pitch count. You, as the investor, can stand in the batter’s box waiting for ‘your pitch’ – such as, an investment property that meets all or most of your requirements: property size, location, single vs. multi-family, crime rate, school quality, dilapidated and needing to be remodeled, or fully remodeled. Once you get, ‘your pitch’ don’t be afraid to ‘turn on it’ and send it over the wall. With that being said, every single investment does not have to be a home run that doubles or triples your money (see what I did there?) in a day, month, or a year. We are coming out of an economic period defined by quantitative easing (QE) and low interest rates making money cheap and readily available. This environment has resulted in an unrealistic expectation that every investment can’t lose and should make at least 50% overnight.

Before we move on to the next ‘P’ we are going to do a little math.

Let’s assume you have $1,000 that you invest in the stock market. If you are able to earn just 1% every day the stock market is open in a year – around 250 days – then you will have $12,032.16 after 1 year. The math equation behind that black box is:

1.01^250 * $1,000 = $12,032.16

After the second year, you would have $144,772.82. More math:

1.01^250 * $12,032.16 = $144,772.82

And one more time to hammer home the concept – known as compounding interest:

1.01^250 * 144,772.82 = $1,741,929.12

Patience is powerful! Now, in the above scenario I ignored the real-world concept of income taxes, which erodes your capital. Leading into our next P – Preservation of Capital.

Preservation of Capital: Pretty basic premise, in theory, but hard for many people to follow in practice. This topic is discussed in all 4 of the books listed above and frankly they all discuss the psychology behind self-sabotage better than I can. But, let’s transition to a topic that is more in my realm - taxes! Yaaay…. There are many tax planning strategies available to RE Investors allowing you to mitigate your tax liability until a future period or potentially forever depending on the strategy. Some of those strategies include: 1031 exchange, cost segregation studies, buy and flip vs. hold and rent, sale of primary residence, minimal rental use of a primary residence (sometimes referred to as the ‘Master’s Exception). I promise I will write a post on each of those strategies; however, what I can’t promise is that those posts will be just as entertaining, but I will try. In my experience, the investors that are best at preserving their capital do the following: develop a plan, understand their risk appetite, and aren’t afraid to admit a mistake. Throwing good money after bad isn’t a good idea and ‘Diamond Hands’ – in my opinion – is not a viable investment strategy. Don’t get me wrong, I am not abdicating that you cut bait and run at the first sign of trouble, but if the facts and circumstances change then you need to re-evaluate, without emotion, whether the RE investment is still viable.

imPerfection: We have all made mistakes in our lifetime. The key is to learn from those mistakes and get better. How does that relate to being an investor and particularly a RE investor? If your initial analysis of a deal was wrong, then don’t be afraid to walk away from the deal before you sink more money into it. Yes, it hurts to lose a down-payment on an investment property, but the initial loss will not be as detrimental compared to if you poured all of your capital into a property that continues to have issues: mold, foundation issues, lead paint, lead pipes. Appraisals and inspections are important, and now that we are entering a buyer’s market, you should be able to ask for them before closing on a deal. There is a term in traditional investing called revenge trading. ”When you engage in revenge trading, you take on one or more trades in an attempt to recoup a reasonably large loss from a previous trade. When we lose money on a deal, our natural tendency is to try to recover it. Sometimes the desire becomes so strong that we act irrationally.” (AUTHOR, https://www.angelone.in/) Don’t be afraid to walk away from a deal if the ‘numbers’ don’t make sense.

Pay yourself: Most of us got into RE investing because we wanted to ditch the W2 job and become our own boss. I have seen success stories and failures, and the main reason people succeed – in addition to following the above P’s – is they keep track of their time in order to calculate their hourly wage. This hourly wage is important when evaluating if the deal was a success or not. Yes, many entrepreneurs do go an extended period of time without collecting a paycheck when they first start their business, but at some point, they make a profit and pay themselves or else they are moving backwards (eroding capital).

I know this first article doesn’t fit the traditional mold for Bigger Pockets but I felt it is necessary for everyone to realize that they are investors and to act accordingly. Investing attracts the best and brightest along with the ruthless so make sure you educate yourself in order to give yourself the best chance to succeed!

@Andrew McGuire

Are you trying to illustrate patience by using an example of an investment that increases in value by 1% every single weekday? That's not patience....that's losing yourself in fantasy.

The point is to demonstrate a well known concept - compounding interest. I am not guaranteeing OR setting the expectation that 1% returns everyday is possible for 99.99% of the people in the world. Compounding interest is powerful because it demonstrates small gains/wins, which are easier to come by than large gains/wins, will create wealth. 

Here is another article which demonstrates the concept:
https://thecollegeinvestor.com...

I guess I didn’t realize how much of the population doesn’t understand math. 

What you fail to grasp are the following:

Number 1, 99.99% of everyone here already understand the power of compounding. You're not telling us anything we don't already know. 

Number 2, and this is very important but will unfortunately probably go right over your head. When you use a crazy unrealistic example to demonstrate compounding, it makes your point a LOT LESS compelling. What investment returns 1% very single day the stock market is open? Absolutely nothing. It's so stupid to use that as an example. I think one of the earlier posters said it best when he said even Madoff couldn't replicate that. LoL. And when you use an example like that, it really doesn't matter how much money you have after ten years. It's some kind of gigantic number of course...duh! But that's expected when you have an investment that provide you with a daily golden egg. Then the compounding part becomes a lot less compelling.  Sorry if this is too difficult for you to grasp.

Everyone understands compounding interest? Ok… if you say so. If 99.99% of people understood compounding interest then everyone would invest small amounts early because small gains COMPOUND and result in larger gains in the future. BUT, everyone now-a-days is looking to win it big with one investment. Any quick Google search demonstrates, to use your term, your ‘fantasy’ that 99.99% of people understand the concept of compounding interest:

rise in options trading:
https://www.cnbc.com/2021/12/2...

rise in gambling:
https://www.wsj.com/articles/p...

rise in scam losses:
https://www.cnbc.com/amp/2022/...

It was an example to get a point across. I didn’t claim that 1% a day was reasonable OR pitch an investment that would guarantee those types of returns. 

The purpose of the entire article was to get new RE investors to realize this is a job. You are exchanging one job where you work for someone else to one where you are working for yourself. In order to be successful, you need to educate yourself. My bad for trying to provide some education. 

Quote from @Reed Rickenbach:

Quote from @Tony Kim:

Quote from @Jeremy Bottlinger:

Quote from @Tony Kim:

Quote from @Jeremy Bottlinger:

What you fail to grasp are the following:

Number 1, 99.99% of everyone here already understand the power of compounding. You're not telling us anything we don't already know. 

Number 2, and this is very important but will unfortunately probably go right over your head. When you use a crazy unrealistic example to demonstrate compounding, it makes your point a LOT LESS compelling. What investment returns 1% very single day the stock market is open? Absolutely nothing. It's so stupid to use that as an example. I think one of the earlier posters said it best when he said even Madoff couldn't replicate that. LoL.

@Jeremy Bottlinger the bulk of your original post is spot-on and I know it took a while to write. I think the reason you're getting pushback is because you're preaching "taking the slow route" but showed an example that outpaces any known investment in history. BiggerPockets members are "numbers people" and are very literal, so hard to ignore that one. Otherwise I thought the post was great. 

Criticism received and processed for future articles. Thank you

I have an article in the works that uses actual real numbers.

Quote from @Tony Kim:

Quote from @Jeremy Bottlinger:

As part of my ideology that education should be free, I will be making a monthly post (if not more often) related to real estate, because a better educated society results in better social and economic opportunities for those members of that society. I would gladly pay more in taxes to allow everyone an opportunity for free education. With that being said, I do NOT believe in loan forgiveness. That doesn't solve the problem with our education system, which is the astronomical cost of education nowadays. The topic may be a short definition, quick walk-through of a transaction, or an in-depth discussion on a technique or principal.

DISCLAIMER: For every question in the world - other than math - the answer is “it depends”. It depends on you and the facts/circumstances of your situation. I will provide as much information as possible to help you understand the topic in order for you to make an informed decision. In some posts, I will refer to books, articles, and studies. I DO NOT receive any commissions for those referrals. I will explicitly call out any instances that I receive a referral commission including the amount, so that you can evaluate for any bias.

TODAY'S POST - You are an Investor

Before I get started, here are some books that I think discuss various principles of investing succinctly, effectively, and in layman's terms:

• The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness https://g.co/kgs/CYYdDN

• Market Wizards https://g.co/kgs/Zea8oW

• Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude https://g.co/kgs/dfnZcm

• The Psychology of Investing https://g.co/kgs/a4mXqU

Yes, some of those are geared more towards traditional investing - stocks, bonds, futures - but the underlying concepts are still applicable to real estate (RE) investing.

Being the owner of rental properties makes you an investor; therefore, you need to ensure you understand the principles of investing. I refer to them as the 4 P's: Patience, Preservation of capital, imPerfection, and Paying yourself.

Patience: Warren Buffett has a great analogy for discussing the importance of patience. He compares investing to being a batter in the batter’s box but the difference is that investors have an unlimited pitch count. You, as the investor, can stand in the batter’s box waiting for ‘your pitch’ – such as, an investment property that meets all or most of your requirements: property size, location, single vs. multi-family, crime rate, school quality, dilapidated and needing to be remodeled, or fully remodeled. Once you get, ‘your pitch’ don’t be afraid to ‘turn on it’ and send it over the wall. With that being said, every single investment does not have to be a home run that doubles or triples your money (see what I did there?) in a day, month, or a year. We are coming out of an economic period defined by quantitative easing (QE) and low interest rates making money cheap and readily available. This environment has resulted in an unrealistic expectation that every investment can’t lose and should make at least 50% overnight.

Before we move on to the next ‘P’ we are going to do a little math.

Let’s assume you have $1,000 that you invest in the stock market. If you are able to earn just 1% every day the stock market is open in a year – around 250 days – then you will have $12,032.16 after 1 year. The math equation behind that black box is:

1.01^250 * $1,000 = $12,032.16

After the second year, you would have $144,772.82. More math:

1.01^250 * $12,032.16 = $144,772.82

And one more time to hammer home the concept – known as compounding interest:

1.01^250 * 144,772.82 = $1,741,929.12

Patience is powerful! Now, in the above scenario I ignored the real-world concept of income taxes, which erodes your capital. Leading into our next P – Preservation of Capital.

Preservation of Capital: Pretty basic premise, in theory, but hard for many people to follow in practice. This topic is discussed in all 4 of the books listed above and frankly they all discuss the psychology behind self-sabotage better than I can. But, let’s transition to a topic that is more in my realm - taxes! Yaaay…. There are many tax planning strategies available to RE Investors allowing you to mitigate your tax liability until a future period or potentially forever depending on the strategy. Some of those strategies include: 1031 exchange, cost segregation studies, buy and flip vs. hold and rent, sale of primary residence, minimal rental use of a primary residence (sometimes referred to as the ‘Master’s Exception). I promise I will write a post on each of those strategies; however, what I can’t promise is that those posts will be just as entertaining, but I will try. In my experience, the investors that are best at preserving their capital do the following: develop a plan, understand their risk appetite, and aren’t afraid to admit a mistake. Throwing good money after bad isn’t a good idea and ‘Diamond Hands’ – in my opinion – is not a viable investment strategy. Don’t get me wrong, I am not abdicating that you cut bait and run at the first sign of trouble, but if the facts and circumstances change then you need to re-evaluate, without emotion, whether the RE investment is still viable.

imPerfection: We have all made mistakes in our lifetime. The key is to learn from those mistakes and get better. How does that relate to being an investor and particularly a RE investor? If your initial analysis of a deal was wrong, then don’t be afraid to walk away from the deal before you sink more money into it. Yes, it hurts to lose a down-payment on an investment property, but the initial loss will not be as detrimental compared to if you poured all of your capital into a property that continues to have issues: mold, foundation issues, lead paint, lead pipes. Appraisals and inspections are important, and now that we are entering a buyer’s market, you should be able to ask for them before closing on a deal. There is a term in traditional investing called revenge trading. ”When you engage in revenge trading, you take on one or more trades in an attempt to recoup a reasonably large loss from a previous trade. When we lose money on a deal, our natural tendency is to try to recover it. Sometimes the desire becomes so strong that we act irrationally.” (AUTHOR, https://www.angelone.in/) Don’t be afraid to walk away from a deal if the ‘numbers’ don’t make sense.

Pay yourself: Most of us got into RE investing because we wanted to ditch the W2 job and become our own boss. I have seen success stories and failures, and the main reason people succeed – in addition to following the above P’s – is they keep track of their time in order to calculate their hourly wage. This hourly wage is important when evaluating if the deal was a success or not. Yes, many entrepreneurs do go an extended period of time without collecting a paycheck when they first start their business, but at some point, they make a profit and pay themselves or else they are moving backwards (eroding capital).

I know this first article doesn’t fit the traditional mold for Bigger Pockets but I felt it is necessary for everyone to realize that they are investors and to act accordingly. Investing attracts the best and brightest along with the ruthless so make sure you educate yourself in order to give yourself the best chance to succeed!

@Andrew McGuire

Are you trying to illustrate patience by using an example of an investment that increases in value by 1% every single weekday? That's not patience....that's losing yourself in fantasy.

The point is to demonstrate a well known concept - compounding interest. I am not guaranteeing OR setting the expectation that 1% returns everyday is possible for 99.99% of the people in the world. Compounding interest is powerful because it demonstrates small gains/wins, which are easier to come by than large gains/wins, will create wealth. 

Here is another article which demonstrates the concept:
https://thecollegeinvestor.com...

I guess I didn’t realize how much of the population doesn’t understand math. 

Quote from @Reed Rickenbach:

Quote from @Jeremy Bottlinger:

If you invest 1k in the stock market and make only 1% a day that the stock market is open - which is about 253 days - then you will have a little over 12k after one year. After two year then 144k and then…

Simple math: 1,000*(1.01)^253 = 12,396.74

But no one wants to hit a single, everyone wants the home run (get rich quick scheme). 

 Dude, what? 12X'ing your account annually isn't a get rich quick scheme? Then what is? 

Are you just trying to attack and nitpick? I am not pitching a get rich quick scheme. 

The point, which seems to be above your head, is compounding interest. Compounding interest allows you to make a little at a time which “compounds” in to significant returns on investment. It teaches people to learn that you don’t need to make 100% on every investment.

I chose an example to demonstrate the power of compounding interest. I didn’t: pitch an investment OR set an expectation that everyone could 12X their investment after one year. 

AGAIN - the point of the post was to demonstrate the power of compounding returns which is known/understood by all successful investors - regardless of what they invest in. Here is an interview with Warren Buffett in which he talks about luck AND compounding interest:
https://www.businesstoday.in/a...

Quote from @Nathan Gesner:

Please tell me where I can turn $1,000 into $12,000 in one year??? If you invested $1000 a year ago, it would be worth $700. If you invested in Apple five years ago, it would be work $3000. 

Yes, if you invested at the peak- which was fairly easy to see if you understood the effects of QE, low interest, and COVID based stimulus had on supply/demand of all assets.  It is very possible to make 1% a day as a day-trader if you ate disciplined and create a plan as outlined in those sources above.

I can also cherry pick investments and numbers to show massive returns whereas you picked overweight tech stocks that were destined for a pull back. 

However, I think you are missing my point. My point is that wealth is built slowly. For every one person that gets rich quick there were 1,000s that crapped out. 

If you invest 1k in the stock market and make only 1% a day that the stock market is open - which is about 253 days - then you will have a little over 12k after one year. After two year then 144k and then…

Simple math: 1,000*(1.01)^253 = 12,396.74

But no one wants to hit a single, everyone wants the home run (get rich quick scheme). 

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $75,000
Cash invested: $15,000
Sale price: $178,000

First Home - Held longer due to 'relationship' turmoil...

A cost segregation (seg) study is a detailed analysis of the components of a building so that the separate components can be separated and classified into shorter depreciation lives. By performing this study, building owners can reap a number of benefits that can positively impact their cash flow and overall financial position. However, a cost seg study is not always a slam-dunk and should be discussed with your CPA to determine if it is appropriate for you.

One of the primary benefits of a cost seg study is the acceleration of depreciation expense. Under normal tax rules, buildings must be depreciated over 27.5 or 39 years - residential rentals are 27.5 while commercial buildings are 39 years. However, a cost seg study allows certain components of the building, such as electrical and plumbing systems, to be classified as personal property, which can be depreciated over shorter lives of 5, 7, or 15 years. This means that the owner can claim a larger portion of the building's cost as a tax deduction in the early years of ownership, rather than spreading it out over 27.5 or 39 years.

Another benefit of a cost seg study is the time value of money. The time value of money principle states that a dollar today is worth more than a dollar in the future. By accelerating the depreciation expense, the building owner can take advantage of the present value of money, rather than waiting 27.5 or 39 years to claim the full value of the building as a tax deduction. This can have a significant positive impact on cash flow and overall financial position which, could, allow you as a real estate investor the ability to acquire additional properties. To illustrate the time value of money in relation to accelerated depreciation in real estate, let's consider a building that has a total cost of $1,000,000. Here is how much depreciation could be claimed each year:

• Over a 5-year period, the building owner would be able to claim $200,000 annually as a tax deduction.
• Over a 7-year period, the building owner would be able to claim $142,857 annually as a tax deduction.
• Over a 15-year period, the building owner would be able to claim $94,684 annually as a tax deduction.
• Over a 27.5-year period, the building owner would be able to claim $36,363 annually as a tax deduction.
• Over a 39-year period, the building owner would be able to claim $25,000 annually as a tax deduction.

NOTE: The above numbers present a simple illustration based upon all of the business components being classified within one time period. In reality, the building will have business components within multiple depreciation periods.

A cost seg study can be performed at any point, whether the building was purchased, constructed, or has been in use for some time. However, if the building is currently under construction or has recently been completed, it is more efficient to perform the study at this time. This is because the schedule of values from the contract file can be used, which makes the process more accurate and cost-effective.

The process of performing a cost seg study typically begins with a walk-through of the building, during which the cost segregation consultant will identify and document all of the building's components, including electrical, plumbing, HVAC, and other systems. They will also identify the costs associated with each of these components and the costs of the building's overall construction. The consultant will then use this information to classify the various components of the building as either real property or personal property, depending on their expected useful lives.

Once the classification process is complete, the consultant will provide the building owner with a detailed report that includes the costs of each component, as well as the accelerated depreciation schedule that can be used for tax purposes. The building owner can then work with their CPA to file the necessary tax forms and claim the additional depreciation. The CPA will report the results of the study by completing Section 481(a) of the Form 3115 to report the additional depreciation being claimed. It is important to work with a CPA when choosing a cost segregation study consultant as a CPA can ask pertinent questions, ensure the final report is of high quality, and help you determine if the ROI of the cost of the cost seg study makes sense for your building.

A few things you should be aware of when considering a cost seg study (based upon my research or seeing ‘scary’ things in practice):

• CPAs CANNOT do these alone
  • o An engineer must be involved OR, in my opinion, an other qualified professional that understands construction and a schedule of values like, maybe, a contractor that:
    • Renovates/builds residential buildings
  • Constructs/retrofits multi-family units
  • Constructs/retrofits commercial buildings
  • An actual cost seg study must be done to break-out components of a building. You can’t just alter your depreciation schedule and ‘randomly’ assign values to various different components of a building structure
  • Evaluate the person/consulting firm performing the cost seg study:
    • o Ask for an example of their final report
  • o Ask for a fee quote
    • Get multiple bids
  • o Compare the example of the final report to the fee quote
    • In my opinion, you NEVER go with the lowest bidder because, as with everything in this world, you get what you pay for.
  • o Evaluate your circumstances with your CPA to determine if a cost segregation study is even worth it for you:
    • If you are already generating passive losses which are being carried-forward THEN there is no reason to get a cost seg study because you are just going to increase the passive losses that are going to be carried forward.
  • Evaluate the fee quote compared to the tax savings generated by the cost seg study. An experienced CPA can estimate/evaluate the potential savings before an actual cost seg study is performed
  • Ask questions – lots of them. If anyone, at any time, no matter where, or no matter what, or who you are with makes you feel like asking questions is a bad thing then avoid working with that person.
    • o Sorry – the above was a little reference to The Office
      • “Don't ever, for any reason, do anything, to anyone, for any reason, ever, no matter what, no matter where, or who, or who you are with, or where you are going, or where you've been, ever, for any reason whatsoever.” Michael Scott

In summary, a cost seg study is a valuable tool for building owners, as it can accelerate depreciation expense, improve cash flow, and increase overall financial position. The process of performing the study is relatively straightforward, and the results can be used to file the necessary tax forms and claim additional depreciation. Building owners should work with a knowledgeable CPA to help you determine if a cost seg study is worth it for your situation.

@Andrew McGuire

As part of my ideology that education should be free, I will be making a monthly post (if not more often) related to real estate, because a better educated society results in better social and economic opportunities for those members of that society. I would gladly pay more in taxes to allow everyone an opportunity for free education. With that being said, I do NOT believe in loan forgiveness. That doesn't solve the problem with our education system, which is the astronomical cost of education nowadays. The topic may be a short definition, quick walk-through of a transaction, or an in-depth discussion on a technique or principal.

DISCLAIMER: For every question in the world - other than math - the answer is “it depends”. It depends on you and the facts/circumstances of your situation. I will provide as much information as possible to help you understand the topic in order for you to make an informed decision. In some posts, I will refer to books, articles, and studies. I DO NOT receive any commissions for those referrals. I will explicitly call out any instances that I receive a referral commission including the amount, so that you can evaluate for any bias.

TODAY'S POST - You are an Investor

Before I get started, here are some books that I think discuss various principles of investing succinctly, effectively, and in layman's terms:

• The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness https://g.co/kgs/CYYdDN

• Market Wizards https://g.co/kgs/Zea8oW

• Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude https://g.co/kgs/dfnZcm

• The Psychology of Investing https://g.co/kgs/a4mXqU

Yes, some of those are geared more towards traditional investing - stocks, bonds, futures - but the underlying concepts are still applicable to real estate (RE) investing.

Being the owner of rental properties makes you an investor; therefore, you need to ensure you understand the principles of investing. I refer to them as the 4 P's: Patience, Preservation of capital, imPerfection, and Paying yourself.

Patience: Warren Buffett has a great analogy for discussing the importance of patience. He compares investing to being a batter in the batter’s box but the difference is that investors have an unlimited pitch count. You, as the investor, can stand in the batter’s box waiting for ‘your pitch’ – such as, an investment property that meets all or most of your requirements: property size, location, single vs. multi-family, crime rate, school quality, dilapidated and needing to be remodeled, or fully remodeled. Once you get, ‘your pitch’ don’t be afraid to ‘turn on it’ and send it over the wall. With that being said, every single investment does not have to be a home run that doubles or triples your money (see what I did there?) in a day, month, or a year. We are coming out of an economic period defined by quantitative easing (QE) and low interest rates making money cheap and readily available. This environment has resulted in an unrealistic expectation that every investment can’t lose and should make at least 50% overnight.

Before we move on to the next ‘P’ we are going to do a little math.

Let’s assume you have $1,000 that you invest in the stock market. If you are able to earn just 1% every day the stock market is open in a year – around 250 days – then you will have $12,032.16 after 1 year. The math equation behind that black box is:

1.01^250 * $1,000 = $12,032.16

After the second year, you would have $144,772.82. More math:

1.01^250 * $12,032.16 = $144,772.82

And one more time to hammer home the concept – known as compounding interest:

1.01^250 * 144,772.82 = $1,741,929.12

Patience is powerful! Now, in the above scenario I ignored the real-world concept of income taxes, which erodes your capital. Leading into our next P – Preservation of Capital.

Preservation of Capital: Pretty basic premise, in theory, but hard for many people to follow in practice. This topic is discussed in all 4 of the books listed above and frankly they all discuss the psychology behind self-sabotage better than I can. But, let’s transition to a topic that is more in my realm - taxes! Yaaay…. There are many tax planning strategies available to RE Investors allowing you to mitigate your tax liability until a future period or potentially forever depending on the strategy. Some of those strategies include: 1031 exchange, cost segregation studies, buy and flip vs. hold and rent, sale of primary residence, minimal rental use of a primary residence (sometimes referred to as the ‘Master’s Exception). I promise I will write a post on each of those strategies; however, what I can’t promise is that those posts will be just as entertaining, but I will try. In my experience, the investors that are best at preserving their capital do the following: develop a plan, understand their risk appetite, and aren’t afraid to admit a mistake. Throwing good money after bad isn’t a good idea and ‘Diamond Hands’ – in my opinion – is not a viable investment strategy. Don’t get me wrong, I am not abdicating that you cut bait and run at the first sign of trouble, but if the facts and circumstances change then you need to re-evaluate, without emotion, whether the RE investment is still viable.

imPerfection: We have all made mistakes in our lifetime. The key is to learn from those mistakes and get better. How does that relate to being an investor and particularly a RE investor? If your initial analysis of a deal was wrong, then don’t be afraid to walk away from the deal before you sink more money into it. Yes, it hurts to lose a down-payment on an investment property, but the initial loss will not be as detrimental compared to if you poured all of your capital into a property that continues to have issues: mold, foundation issues, lead paint, lead pipes. Appraisals and inspections are important, and now that we are entering a buyer’s market, you should be able to ask for them before closing on a deal. There is a term in traditional investing called revenge trading. ”When you engage in revenge trading, you take on one or more trades in an attempt to recoup a reasonably large loss from a previous trade. When we lose money on a deal, our natural tendency is to try to recover it. Sometimes the desire becomes so strong that we act irrationally.” (AUTHOR, https://www.angelone.in/) Don’t be afraid to walk away from a deal if the ‘numbers’ don’t make sense.

Pay yourself: Most of us got into RE investing because we wanted to ditch the W2 job and become our own boss. I have seen success stories and failures, and the main reason people succeed – in addition to following the above P’s – is they keep track of their time in order to calculate their hourly wage. This hourly wage is important when evaluating if the deal was a success or not. Yes, many entrepreneurs do go an extended period of time without collecting a paycheck when they first start their business, but at some point, they make a profit and pay themselves or else they are moving backwards (eroding capital).

I know this first article doesn’t fit the traditional mold for Bigger Pockets but I felt it is necessary for everyone to realize that they are investors and to act accordingly. Investing attracts the best and brightest along with the ruthless so make sure you educate yourself in order to give yourself the best chance to succeed!

@Andrew McGuire

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