The first rule of investing is preservation of capital. The second rule of investing is having an appropriate allocation strategy that encompasses an array of investment asset classes, otherwise known as diversification. Are there more rules? Yes, but none more important than these two. Preservation of capital, diversification of investments; both rules apply to real estate investing as well.
Preservation of capital is imperative because without it there are no future investment decisions to make. Having an allocation strategy is helpful in assuring your basket of investments maintains a reasonable level of balance between investment types; not becoming over-weighted in a single category.
From my perspective, your home is not real estate. The home you live in is a place to reside first and, perhaps, an investment second. Think of it this way; if you had to sell all your “investments” would your home be on that list? Note, I did not say assets but investments. Therein lays the distinction. We do not rely on our “home” for investment yield, nor would you want to sell it based on its investment performance. To explore this concept further, read 12 Steps to Home-Ownership.
The rule of 72 is a well-known rule of investing. The rule states that investments with a 12% rate of return will double your money in six years. Conversely, an investment yielding 6% will require 12 years to double the investment.
This simple rule, while effective in providing a framework for thinking about investing, precludes telling the entire story. Whereas your return on investment is important, there are many other facets to consider when investing your hard-earned money.
The elephant in the room is often inflation. Inflation erodes investment value. For example, the rule of 72 does not take into consideration the decrease in value of a dollar from of an increase in prices from inflationary occurrences.
Another influence on yield is poor decision-making by the investor, or on behalf of the investor, by his or her advisers. Additionally, as the world gets smaller, global economic events, or weather for that matter, can influence your investment returns.
When evaluating nvestments, what does your real estate allocation look like when removing your home from the list of real estate investments? Are you under-weight in hard assets? Take a look. Its’ always good to have another set of eyes looking in on your long-term investments and investment strategy. Consult your trusted advisers, your financial planner and accountant.
For more information on real estate investing, home-ownership and property management, listen to the podcast John Wilhoit on Real Estate.
John Wilhoit is a real estate professional specializing in residential asset management and property management. John has an undergraduate Degree in Business and a Master’s Degree in Urban Studies. Learn more about John here.