Test Drive/Lesson One—Contents

  Investment Principles
  Key Elements to Consider When Selecting an Investment
  Personal Use versus Investment Real Estate
  Before Tax Cash Flow Explanation
  Practice Problem—Part 1
  After Tax Cash Flow Explanation
  Practice Problem—Part 2

  Investment Principles

Before diving into how to do the numbers when listing or selling small rental properties, let's do a quick review of what investing is all about.

What is investing?

All marketers of investment vehicles, whether they are real estate agents, stock brokers, insurance agents, and so on, are asking investors to do the same thing...give up some current spending and divert the money into an investment. The formal economic definition of investing is:

Investing is the act of restricting present spending or consumption in exchange for a possible increase in additional spending or benefits in the future.

This definition is based on the concept that people can only do two things with their after-tax income. They can immediately spend their income on goods and services, or they can invest the income. Every dollar spent today is a dollar that cannot be invested for the future. Every dollar invested today is a dollar that cannot be spent on current items. Do not confuse investing with saving. A savings account is just another type of investment vehicle.

As real estate agents we quickly discover that the world is full of people who may talk the talk, but when it gets right down to the decision, they will not invest. These people simply do not have the discipline to restrict some of their current spending in order to invest, or they simply are not risk takers.

When working with potential small rental buyers, it is important to quickly determine if they are serious investors. If you don't screen your prospects you may find yourself spending time and energy with people who will always find a reason not to buy. The bottom line may be that they cannot admit to themselves that they do not have the discipline to curb current consumption, or that they are not risk takers. These are the "coulda, shoulda, woulda" types that never invest.

If you want to save yourself grief, always pre-qualify your prospects, both financially and based on their willingness to invest. Finally, be careful when dealing with people who are students from no money down programs. Some of these programs teach techniques that are questionable and could lead to problems.

Reasons Why People Invest

Most people invest for one or all the following reasons:

1. To acquire wealth for their retirement;


2. Accumulate for their children's education;


3. Create an estate for their heirs;


4. For the prestige that society gives successful investors

Major Investment Vehicles

What to invest in is always a dilemma, but the main choices are:

1. Savings accounts and certificates of deposits;


2. Stocks and mutual funds;


3. Bonds and notes;


4. Real estate;


5. Collectibles;


6. Direct ownership in a business;


7. Plus many other possibilities.

Each investment vehicle has its advantages and disadvantages, and an investor must decide which is best for their lifestyle. The key is to have a balanced portfolio. The old adage of "don't put all your eggs in one basket" applies. Most financial advisors stress the need to spread out risk over a variety of investments so if the market drops in one vehicle, your portfolio can be propped up with other investments. A balanced portfolio will have adequate insurance, some liquid savings, some fixed return instruments, and some equity growth potential. As an investment, real estate rentals can generate equity growth, as well as current cash flow.