The Reason We Invest

One of the questions I ask real estate investors when I’m doing consultations or taking them on as new clients is, “What is your goal?”  I’m not looking to discuss particular types of transactions, but rather what they are looking to accomplish with their investments from an economic standpoint.  Obviously, the answers vary due to each individual’s specific situation, but they should have some consistent themes as to why investing is being done:

• For the purpose of generating consistent, recurring cash flow.
• For the purpose of gaining wealth through appreciation of assets which can be achieved through multiple methods, not just the passage of time and inflation.
• For both cash flow and appreciation.
• Because the investor has the opportunity to take a cash-flowing or appreciating asset and use it to benefit the local community.

The ideal investment does all of these things, and it does it in a way that improves the local community by providing safe, affordable housing; improving the street appearance and quality of residential real estate, thereby lifting the value of the properties in the area because the ugliest house in the neighborhood is no longer the ugliest house; provides consistent, predictable cash flow when managed appropriately; and over the passage of time, because of amortization, inflation, improvements, etc., the property appreciates significantly in value.  These should be the goals and reasons behind why we invest in real estate.

There is, yet, a deeper, fundamental reason why we invest, and that is because deep within our souls, somewhere in the American DNA, is the unquenchable thirst (described in the Declaration of Independence as the “pursuit of happiness”) to achieve something and leave for our family and the world something better than what we were given.  We are looking to build upon that with which we have been blessed to bless those who come behind us.

I want to remind you of something the Declaration of Independence says.  It states that governments were instituted among men for the purpose of securing the rights of life, liberty, and the pursuit of happiness.  When 56 men of means and substance signed off on these powerful words, it represented a different standard of living and thinking about life.  At that time, America was 13 colonies to which all of the English common law rules applied.  Right and privilege were a matter of birth in England, but in America, anyone could own real estate and determine their own destiny, and they could do with their land as they saw fit.  That concept was foreign to those in Europe.

Almost 250 years later, some of these things have changed, but not for everyone.  Many of Americans have lost some of the individual liberty they used to have over their own property, while many in Europe still don’t have the same ability to own real estate as we have in the United States.  Yes, those in Europe can own real estate, but it’s often more difficult and complicated to achieve.

This takes us back to my initial question of why we choose to invest.  Some may choose to invest in real estate simply because they believe they can make large amounts of money quickly, which is possible, but it isn’t as easy as those get-rich-quick, overnight-success gurus make it seem. 

You also have to understand that those activities are subject to a greater level of taxation.  Taking advantage of certain rewards in the Tax Code influences why and how we invest, but investing solely for the Tax Code is allowing the tail to wag the dog. Being tax aware is important to be a good investor, but doing everything the way you do simply because of the taxes is not necessarily prudent.  It has to make tax sense, cash-flow sense, and business sense.

I encourage you to take a few minutes to write down the reasons I’ve laid out here as to why we invest.  This will help you process them.  Then evaluate each one on a scale of 1 to 10 as to how much it matters to you.  How important is cash flow?  How important is having current large chunks of money?  How important is gaining long-term wealth through appreciation?  How important is it to be tax savvy?  And how important is it to benefit your community?

Once you have assigned a number to each, list them in their order of priority for you, and insert your own reasons for investing into the list.  You will now have a checklist to apply to the various deals that come before you to help you determine if a deal is consistent with your overall investing strategy and theme.