Are you overlooking the most important factor in evaluating that investment?
There’s a critical mistake that most investors make. It’s an easy one to miss. It will make all the difference in long term finances and wealth. It can dramatically impact how much you have to work, how much you have to sacrifice out of your paycheck, and how stressful your life is in the meantime.
There are multiple ways to advertise the potential returns of an investment, and to compare investment options side by side. There are cap rates, yields, IRR, cash on cash returns, and more. It all really distills down to the two ROIs.
Return On Investment
How much am I going to make? That’s what we all want to know, right?
Again, there are multiple ways to calculate this. Be sure you are looking at the same math when comparing options.
Other important factors to consider are:
- What is the experience of the manager to deliver on the best-case scenario?
- What events may lead to lower yields or total returns?
- What is the worst-case scenario?
- How will your individual returns be based on how any debt or equity is structured?
- How might taxes and inflation impact your true net returns?
The Other ROI: Return Of Investment
Return of your investment is far more important than any promises or hopes of a nice return on your investment.
Warren Buffett’s number one investment principle is don’t lose money. Rule number two: don’t forget rule number one.
Why? Because, if you lose your capital you have nothing to reinvest with. Even if you make zero returns, you’d still have money to make some home run investments and make up for lost time. If you get wiped out, you might spend many more years working overtime to replace that before you can start investing again.
This is why the wealthy are often criticized for what appear to be low yield investments. They know that wealth preservation is vital. Yields and capital gains are the icing on the cake. They are also savvy enough to see some of the additional returns that others don’t. For example, modest yielding commercial real estate which also provides tax benefits and capital gains on the exit. That might take what the amateur thinks is a 7% return to being a 15% or 25% net return on exit.
Of course, you don’t want yields so lean that you’ll be losing money after inflation and taxes. That is just slowly bleeding out to a drawn-out financial death.
You’ve got to have balance. So, while the hope of 70% returns on some unheard of tropical island in a new condo building from a developer you’ve never heard of might sound appetizing, you’ve got to consider how safe your capital is, and the likelihood of the return of your investment. The same goes for trying to bet on the next Facebook. Sure, a tech stock might be able to deliver 100x if it is the one in a million next Google or Apple. Though you might also have a 999.999% chance of losing it all.
Don’t lose money. That’s the most important thing in investing. You may have to step out of your comfort zone a little and take very calculated risks to get ahead and generate returns which will keep you ahead of inflation and Uncle Sam. Yet, return of your investment capital is far more important than hopes of glittery returns. This is why Praxis Capital loves tangible real estate investments. Ones which can keep delivering cash flow, regardless of the greater economy and short-term value fluctuations. It’s a fortress for capital. Yet, the upside can be far better than expected once an exit is achieved. It works, and despite having gone through deep recessions, our investors have never lost money. Find out what we’ve been investing in via these case studies.