June 4, 2013 by Dymphna 11 Comments

Where Are You in the Investment Life Cycle?

Today I want to talk about the “cycle of life” as an investor and where you are…or should be. Now, I’ve talked about this before in my boot camps and maybe even in an e-letter or two, but judging by the questions I’m getting from some of you, I think it’s time to revisit this very important issue in terms of what to by first, or second or what to buy next.

It’s not rocket science, as they say; it’s simply about logistical planning. That is, it’s about understanding where you are in the investor life cycle. It’s also about what kind of investor you are. I’ll get to that part in a minute, but first let’s take a quick look at the investor life cycle…


The investor life cycle

Your life cycle as an investor really doesn’t begin until you reach the accumulation phase in your life. When is that? Well, from the diversity of ages of you, my students, there really is no one set age or time of life. (Although, obviously the earlier in life you begin, the sooner you’ll be able to pull the pin on your job.) But the accumulation phase really begins when you as an individual realize that you want financial freedom and can see that possibility.

Think back to when you were, say, 20 years old and were getting your first real paychecks. Chances are good that you saved your money only to spend it on Saturday nights, buying all kinds of clothes, a nice car and all of that kind of stuff.  Then, after a bit of that, you got a little more serious, got a better job, maybe bought a house, got married and had children.

But guess what? That “better job” either didn’t pay as well as you thought it did when you were single, or just as likely, you realized that at the rate you we’re going, it would take you 30 years of working to pay off your house, maybe save a bit for retirement, and then that’s it. You found yourself on a mouse wheel career, running just to stay in place.

That’s when the penny drops, isn’t it? It doesn’t matter where you are in life, what matters is your change of viewpoint; your willingness to learn how to take your future in your own hands and get your financial freedom in a matter of a few years.

This realization begins the accumulation phase in your life which we’ll look at today.


Three steps in accumulation—Step #1

Like most things in life, you can break down the accumulation phase as a real estate investor into simple steps. Step #1 is to replace your income. The first step or goal of real estate investing is to replace your earned income with passive income through cash flowing properties. This is probably the most important step because it begins with your first property purchase.

This brings me right back to your questions about which property should you buy first, or second or third…or not at all. The answer really depends upon your own personal situation and what kind of investor you are. It also affects how quickly you move from Step #1 to Step #2.


What kind of investor are you?

By that I mean what are you really willing to do to reach your goals and how quickly? Reaching Step #1 of replacing your current income with passive income is a massive step. But to get there, you need to put some things on the back burner…

I know some of you ladies will not appreciate this, but you should not be in your “dream home” while you’re trying to get through Step #1, or even all the three steps. Paying on a large mortgage, higher property taxes, maintenance and all the rest is not a smart investment move. And chances are, you’re not using your “dream home” for any revenue streams, either. So from an investment perspective, your dream home is really a nightmare when it comes to reaching your goals; a bit like putting the cart before the horse.

On the other hand, some of you—most likely you men out there—think that you should live wherever you want and rent your PPR while you’re buying rental income properties. But that’s not the smartest option, either. When you do that, you lose the ability to manufacture growth and passive income as well any equity growth and tax benefits. So, unless you are living by yourself, neither of these two options is likely to fly with your spouse; and besides, neither are smart investment strategies.

Instead, you should be using your PPR as an investment where you can create manufactured growth or income, or both. If you’re in dream house/nightmare house scenario, get out of it. Or at least use the equity you may have in it to buy positively cash flowing properties. If there is no equity, you have no good investment reason to be there.

That said, replacing your current income with passive income is crucial. If you have enough equity or cash to either do an add-on or a granny flat on your PPR, then by all means do it. If, however, you don’t have enough of either, then you will need to do a chunk deal to raise the capital to move forward. That may come from selling your dream house or partnering with a seller on a deal, but either way, you’ve got to make that first move to get on the path to Step #1.

As you can see, the rules for getting there will differ with each of you. But what remains the same is that cash flow has to be taken into consideration at all times! Let cash flow, or the lack of it, determine what your next deal will be.


Step #2: Double your income

Once you’ve replaced your earned income with passive income, you have more options open to you. You can stay at your job and use the extra money to buy more properties, which is the fast track to reaching Step #2 and what I personally favor. Or, you can quit your job and continue more or less on the pace you began with in Step #1.

Either way, you will still let cash flow determine what your next deal will need to be. This is the ‘why’ and ‘how’ of establishing and maintaining a balanced portfolio. Say, for instance, like so many of my students, you’re still working and haven’t yet reached Step #1 or #2, but you come across a great manufactured growth deal that you just can’t pass up. I see this quite often.

This kind of deal can slow you down a bit, but because the upside is so positive, whether in chunk or cash flow, you’ve decided it’s worth the delay. There’s nothing wrong with that, as long as it doesn’t interrupt your cash flow to any large degree. And more than likely, the upside will end up moving you along the track toward your goal, whether it’s Step #1 or #2.


Step#3: Tripling or quadrupling your income

Once you have reached Step #2 and doubled your income, it’s usually the case that you pull the pin on your job.  With with the cash flow from your doubled income level, you have enough capital on hand to accumulate more properties. Within a relatively short space of time, you will have tripled or quadrupled your old salary.

At this point, your time becomes more valuable to you than ever. You can do what you want with your life. Good on you! You have earned your financial freedom and your biggest challenge now is managing your portfolio and deciding what to do with your free time.

What to do next? Well, I strongly suggest that when you get to Step #3, that you help others get on the track that you’ve been on. You have valuable knowledge and experience; sharing both with others can give your life a new sense of meaning that you never thought possible…

Trust me on this.