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Pieces of the Puzzle

In my office, we generally spend time doing a variety of things:

1)     Talking about, or investing in, residential real estate

2)     Discussing the use of various non real financial instruments and how we can maximize our investing dollars through them, such as stocks, bonds, options, or currency trading

3)     Trying to identify the next emerging entrepreneurial trend that we can potentially capitalize on for profit.

One thing that we tend to talk about when we are discussing wealth accumulation is the idea of ‘pieces of the puzzle.’  This is the notion that, everyone should be building a portfolio of sorts, and each person’s portfolio is a unique ‘puzzle’ with different needs and goals.  For some people, opportunities that seem really attractive and desirable in one portfolio are an absolute misfit in another portfolio.  Hence, you have opportunities that appeal to you that will not appeal to someone else.  The idea, of course, is that when you identify an opportunity that you are interested in then you work on accumulating it, and once you do you have added another ‘piece’ to your portfolio.  Hence, ‘pieces of the puzzle.’

We have very few debates(dare I say arguments) at, but one of the most continuous dialogues that continues to arise is what really constitutes a great investment opportunity.

You see, you have people who are willing to pay full price for an investment home(generally multi unit), who then generate MASSIVE cash returns from purchasing 3 unit multi family homes.  They don’t care about the equity position.  They come to a place like Memphis for the cash flow.

Then, you have the person who is really interested on buying based on an instant equity position.  A good equity position will allow you some cash flow, but your options become limited because you(generally) in Memphis are limited to single family residential homes.   Furthermore, people are divided into two equity ‘subgroups’ if you will:

1)     A person who wants to buy as cheaply as possible to give themselves an instant equity play, or:

2)     A person who wants equity but also demands cash flow, which restricts their buying options.

Of course, you also have people who are interested in neither cash flow or equity positions, they only want to capitalize on the tax benefits that are present in investment homes, such as buying slightly higher priced homes in Memphis(read: 130K+) which really would, at best, generate break even cash flow but does generate a tax shelter which is of more value to certain investors.

Bottom line?  There is no ‘best deal.’  There are only deals which are attractive to you.

Now, I build my portfolio trying to maximize the dollar value that I can get from each parcel.  In this way, I tend to buy multi unit properties.  Given the fact that I, as a (previously) stated income borrower, had a finite number of mortgages I could attain with ease, I really needed to maximize my positive cash flow.   This strategy has been good for me.

What is interesting though, is that every time I find a property that I think is a fantastic deal, many of our clients will peruse it briefly only to pass it buy.  That doesn’t necessarily make these opportunities bad properties – it is just that some investors come from coastal markets and spend more time looking at the valuation of properties rather than cash flow, but remember – Memphis is a cash flow market.  So, for investors to be buying strictly on equity positions within a cash flow market does not necessarily define a bigger picture, so to speak, and sometimes allows investors to dismiss opportunities that may have been a good ‘piece’ of their puzzle.

Generally speaking, people looking for investment homes, especially less experienced investors, need to focus on WHAT their goals are before trying to purchase a series of investment homes.  As my yoga teachers always say, ‘thought precedes action’.  The same rule applies when considering accumulating investment properties.

1)     Identify cash flow goals(or equity goals, etc.)

2)     Formulate multiple exit strategies, short, medium, and long term.

3)     Identify your investment criteria(equity position, minimum monthly cash flow goals), investment areas

4)     Search your desired area(ideally, with the help of an experienced agent or investor)

The important thing to remember is this: It is difficult for a new investor to think beyond owning their first house.  For experienced investors, sometimes there can be a drastically perceived distance between where they are today and what needs to be done to meet their ultimate financial goals through investment real estate.  The answer for both of these investor types is strikingly similar:

Look for pieces of the puzzle.