Investing should be for everybody, but sadly, investing is not for everybody. This is because people tend to jump into investments without much thought. Maybe it is because they heard a stock tip from a work colleague, or one of their family members hit it big on an investment, and they want to get in on the action. Whatever that reason is, it forces them to jump into an investment that they have no knowledge on, and they get emotional if they lose money. So, instead of just jumping into an investment, we strongly suggest doing your due diligence before committing to that investment. To help out, we’ve compiled a list of 5 questions to ask yourself before investing in anything.
1. What is your time horizon?
Before jumping into an investment, it is important to understand your time horizon. How long can you afford to part with the money you invested, and when do you expect to need it. This is a huge mistake that many investors make. For example, we had a Canadian Cashflownaire Member ask us about a house flip opportunity they had in their area. The first question I asked was, “can you handle being stuck renting the property if the value of the home dips?” If the answer was no, then his time horizon is short. If your time horizon is short, you probably can’t afford to take on a risky investment like a house flip.
2. What is your risk tolerance?
An investor needs to have some sort of risk tolerance. A risk tolerance means they are comfortable with the possibility of losing money. Someone who has a higher risk tolerance will chase investments that could make a higher return. For example, taking on leverage, like a mortgage on a rental property, can increase your return on investment by multiples, but it can also magnify losses in the event that the investment goes sour. Everyone’s situation is different, and you need to ask yourself what your risk tolerance is before you jump into an investment.
3. How much capital do you have to invest?
We love investing in real estate. We have invested in single family homes, build-to-rents, mobile homes, etc. We’ve also invested in things like stock, precious metals, and bitcoin. Each time we made that investment, it came down to opportunity and amount of deplorable capital we had (ie. Money in the bank). So often we have people reach out to us explaining that they want to invest in real estate, but don’t have the capital for a down payment on a rental property. Yet, they still spend hours on end, studying real estate investing by reading books and watching videos. Instead, they should focus time on a different type of investment that requires less capital. Early in our journeys, we were attracted to buying and renting mobile homes because they required little capital to purchase. We sold them as rent-to-owns received quick return on our investment. We would then flip that into another investment. We also focused on purchasing dividend stocks because you could start with as little as $5. We then used the dividends earned to make more investments. As things progressed, we accumulated more capital from our savings and our investments. Today, we are able to make bigger investments because we have more capital to deploy. The amount of capital you have to invest should help dictate where you focus your time on investing.
4. How much time can you commit?
As we’ve said in the past, real estate can be a great investment. But it also requires a commitment of your time. A lot of times, some of the best investment require you to invest your time on top of your money. But this may not be for everyone. For example, we love investing in real estate. But the one real estate investment we’ve shied away from was short-term rentals, i.e. Airbnb’s. We think these can be great investments if done correctly, but based on our schedules, we feel we cannot invest the time needed to make these successful. For others, this may be the perfect investment that fits with their schedules.
5. What other opportunities are there available to you?
Sometimes in life, you get presented with great opportunities. Unfortunately, you can’t take advantage of every opportunity. You may not have enough money or enough time to take advantage of every investment opportunity. That is why, before jumping into an investment opportunity, we suggest you brainstorm other investment opportunities that you could be sacrificing by taking this one on. This will force you to really analyze if this investment really is the right opportunity to jump into. We all get distracted from time to time. I can’t tell you how many times we hear about investment opportunities and want to jump in full force. But sometimes, this means losing focus on the investment systems we’ve mastered. We like to call this, “shiny object syndrome”. It’s great to try new things, but sometimes, you need to make sure it doesn’t sacrifice the things you are already good at.
Every investment requires thought before jumping in. But you don’t want to be guilty of “analysis paralysis”, where you spend so much time analyzing opportunities that you never take action. Sometimes, you need to step out of your comfort zone. That is, why feel that once you are able to answer these 5 questions about a possible investment opportunity, and you are satisfied with the answers to these questions, then you can confidently dive head first into the opportunity.