5 Deadly Sins of Capital Investing

There are several key factors to successful investing.  Learning these key factors when you are beginning your investment journey can help determine your success.  Keeping these key factors in your mind increases the likelihood of your success with investing in real estate. In order to become a successful capital lender, you must make sure you do not commit these 5 Deadly Sins of Capital investing.

Not Having a Strategy

The first deadly sin of capital investing is not having a strategy.  Many people fail with investing because they jump in with just a little bit of knowledge but without having a really detailed strategy.  A detailed investment strategy should cover the whole range of questions: who, what, when, where, why, and how.

Understanding your goals and the strategy you are going to follow means that you will be prepared to jump in on a good deal when it comes along.  You will also be able to determine when a deal is not the right fit for you.  Knowing your strategy keeps you focused and stops you from chasing shiny objects.

WHO? For example, who do you want to invest with? Epic Impact Investors is a hard money lender.  Investing with a hard money lender like us means we review the deals, secure the proper paperwork, and handle the relationship with the borrower.  As part of defining your investment strategy, you need to get to know who you will be investing with, their reputation, and their practices.

WHAT? There are also many “what” questions to answer.  What is it that you want to do with your investments? Buy and hold? Flips only?  What types of properties are you interested in investing in? Residential? Small Commercial? Multi-family?  There is no single answer that is right for every investor, it will depend on you and your goals which is why you want to think through your strategy.

WHEN? When are you planning to invest?  Capital investment in a hard money loan can take up to a year before you see your return.  That is a whole year (or more)  before your capital is returned and your interest is received.  When is the right time for you to have your capital invested? When will it be best suitable for you?

WHERE? Where is another question with multiple answers.  You need to consider where, geographically, you want to invest?  Is there a specific property? A certain neighborhood?  Do you want to stay in your local area or invest out of state?  Then you also need to know where you are getting the money from to invest.  Where is your source of funds going to come from? Your savings? Your 401k or self-directed IRA?

HOW? Part of your strategy needs to be knowing how much you will invest.  How much can you handle having tied up for a year?  How much are you comfortable with investing? Do you understand what your risk tolerance level is? Do you know how much you are comfortable with risking?

WHY? Finally, ask yourself why you are investing in real estate in the first place.  If your only reason for investing is just the money you might just drive yourself crazy if you don’t get a return or if something doesn’t come out the way you want.  For example, closing the wealth gap and building black wealth through entrepreneurship and real estate is a big “why” for us here at Epic Impact Investors.  Beyond money, think about why you are investing.

Not Understanding Your Risk Tolerance

The second deadly sin of capital investment is not understanding your personal risk tolerance level.  People tend to overlook the importance of knowing what level of risk they are comfortable with when investing. Are you comfortable investing $60,000? If you lose that investment are you going to be okay or have you just wiped out your entire life’s savings?  Can you lose that money and still take care of your kids, pay your mortgage, and help out your elderly parents?

Only know your complete financial situation.  If you don’t take into consideration what you are comfortable risking, you might find yourself in over your head.   Make sure you thoroughly understand your personal risk tolerance level.

Incorrectly Sourcing Your Capital

Not sourcing the capital that you're going to use to invest correctly is the third of the five deadly sins for investing.  I briefly mentioned a few sources like your savings or retirement fund that can be possible sources for your investment capital.  Not sourcing your capital correctly can cause you more harm than good.  For example, what are the tax implications for using your retirement fund? Are you taking more from your savings than you need to run your household?

Not Understanding the Deal/Opportunity

The fourth deadly sin is not understanding the deal, or the investment opportunity, that you are investing in.  Deals vary a lot and every deal is different.  You need to have an understanding of what the specifics are of the deal that you are entering into.  Is this project just a cosmetic residential flip?  Is this a free-standing commercial property or a strip of retail stores? What does the inspector have to say? Are there foundation issues?  Will this property flip in a year? 18 months?

You need a full understanding of what is going on with the deal so that you feel comfortable.  You need to be knowledgeable about how your money is going to be invested and how long it will be invested.  Since every deal is different you need to understand, from the beginning, what you are getting into so you can determine if it is the right project for you, your goals, and your strategy.

Not Working on Your Money Mindset

The fifth, and final, deadly sin of capital investing is not continuously working on your mindset about money and investing.  This is something too many people overlook.  Continually working on your money mindset really contributes to growing your investment experience.

You want to come from an abundance mindset, not one of scarcity.  Abundance is relative to you though.  You might currently be able to do a $60,000 or $75,000 deal but if you continue to build your mindset you might soon be ready to move on to $150,000 or $500,000 or even a million-dollar deal. In order to get there, you have to continually work on your mindset so that you are prepared for those bigger investments.  These big numbers scare a lot of people away but working on your mindset can keep you from running..

All of these work together.  When you know what your investment strategy is, when you know what your risk tolerance is, when you know where your capital funds are coming from, when you understand what the deal is, and when you are in the right mindset then you won’t miss a good investment when it shows up.  Your closed mind or lack of insight won’t keep you from a great opportunity.

Falling victim to any of these deadly sins minimizes your ability to create sustainable wealth through capital investing. Working with a company such as Epic Impact Investors can help you create a strategy, mitigate risk, and teach you the foundational concepts around investing your hard-earned money. Schedule a call today.