Avoid The Risks & Apply The Right Criteria To Any Investment Type
We know. Wealth building sounds scary when it includes the word “investing.” After all, the word invokes images of cut-throat businessmen conducting boiler room deals in starched suits and ties. The truth of the matter, however, is that anyone can be — and should be — an investor.
When it’s done right, investing isn’t a risky process. It follows a rather straightforward model:
Create a list of criteria that you use to evaluate any investment that you are considering.
The criteria will lay out the qualifications that any potential investment must meet in order to be considered worthwhile.
Evaluate all investment opportunities with these same criteria.
Don’t skimp here. If something doesn’t meet your criteria, move on.
When an opportunity meets your criteria, move fast.
Sound investing requires patience. To find the right opportunity, you will likely have to pass on other opportunities that don’t meet your criteria. However, when something appears that meets all the criteria you’ve laid out, you also must be willing and able to take action.
This three-step approach will allow you to minimize the risk of a bad investment and maximize your monetary return. And it doesn’t just apply to houses. We’ll apply this step-by-step approach to two different types of investment opportunities: purchasing real estate and investing in the stock market. Follow along with us as we take you through this financial exploration.
Buying a Rental Property
Whether you’re already a homeowner or not, real estate can prove to be a very worthwhile investment opportunity. After all, no matter how the market fluctuates, real estate is always worth something. But how do you know if the property you have your sights on is a good one for your wallet? This is where you would apply the 3-step model we mention above to the property and determine its viability as an investment.
The first step is to know the criteria you’re looking for in a property. Have a clear idea of what you’re looking for, things like your ideal location and type of property. But your list of criteria shouldn’t end there; there’s a lot more you need to consider. After all, there are a multitude of real estate opportunities around and the more specific you can be, the better the likelihood you can jump when the right property hits the market. As we say in The Millionaire Real Estate Investor, “Your criteria provide you with as precise a picture as possible of your ideal investment property, and the clearer that picture is, the better the odds are that you’ll recognize it when you see it.” Ask yourself what features and amenities are must-haves for a property. Do you want a fixer upper or a property that is move-in ready? How do you feel about new construction? Each criterion you pinpoint will help you to judge real estate opportunities that arise.
It's your job as a potential real estate investor to evaluate every property that comes across your radar with the criteria you’ve set for yourself. And if a property doesn’t fit these criteria, move on. We know that may seem surprising if say, your Uncle Joe brought the cutest little bungalow to your attention, and it would be perfect with a kitchen and bathroom upgrade. But your criteria outlined that you only wanted move-in ready condos. Suddenly, no matter how cute it may be, a fixer-upper with a yard to mow doesn’t sound quite so perfect anymore.
Having the patience to wait for the right opportunity when you’re seemingly turning down other properties that don’t align with the criteria you’ve set can seem, at times, like the hardest part. But as Gary and Jay write, “Being active and engaged doesn’t mean you’re always buying and selling. What it does mean is that you are consistently searching with your criteria, watchful for the moment when opportunity surfaces.” And because you have determined the type of property that you’d jump for, when the right property comes to your attention, you are ready to act fast to purchase it.
It’s a different beast, but you can apply the same basic investment model we outlined above to investing in the stock market as well. The stock market can be volatile, no doubt, but we certainly understand its appeal for some folks. Watching the latest technology stock take on a meteoric rise, it’s hard not to want in on the deal.
I remember a college classmate (just a few short years ago) telling me the story of an elementary school investment project she worked on, where her parents allowed her to use a small amount of her own money rather in conjunction with the fake budget her school provided. She put all of her money into one particular computer company’s stock. By the time I met her in college, she had earned enough from that elementary school stock project to put herself through private college. I bet she did well on her report card that quarter too!
But determining the quality of a stock’s performance, like real estate investments, requires a good amount of due diligence before you decide to take the plunge. Like real estate, we suggest creating a list of criteria of what you expect your stock investment to look like. Is there a particular industry or theme you are interested in? Do you have knowledge about this arena that gives you some additional insight into the trends and happenings that could help or hurt the stock? Do you have a return you are hoping to realistically achieve in a specific timeframe?
Once you know how risky an investment you’re comfortable with and the type of stock you’re interested in, it’s time to consistently do your research. Read up on the industry and financial news involving the market and stocks you’re watching. Stay up to date on what’s going on in the companies involved in these areas. Learn what the experts think. And critically compare the stocks you’re looking at investing in against the must-have criteria you’ve previously established.
If a stock has aligned with your criteria, it’s likely that it’s the right investment for you.
When it comes to all types of investment opportunities, it’s possible to take much of the risk and fear out of the transaction. When you’ve pre-determined the criteria that matter most to you and don’t stray from meeting these criteria, you’re far less likely to make a rash decision you later regret. Of course, we aren’t financial planners, so we always suggest bringing an expert into your sphere who you can trust for specific advice related to the investment opportunities that appeal most to you! What tips and tricks have you learned along the way to ensure you make great investment choices? Let us know your favorite strategy on our KellerInk Facebook page! And don’t forget to subscribe to our newsletter for more of our new research and latest stories.