I was having lunch with a good friend and investor named Emmett, recently. We talked about the current market and strategies we’re implementing, and we discussed what we see our other investor friends doing.
One of those friends hasn’t done many deals lately because she got her start when the market was at the bottom. Now that the market is moving so much, she is afraid it will collapse at any time. She’s been talking about the coming market crash for the past three years, and that fear has made her so conservative that it’s kept her from buying houses.
Another friend added a real estate license to his business. The more he met with sellers he couldn’t make a deal with, the more he realized he was leaving money on the table every time he referred those sellers to an agent. Now his strategy is if he can’t buy the seller’s house, he can at least list it.
That’s a very interesting strategy.
He went on to get his broker’s license and now has a budding realty business.
As we talked, Emmett said something interesting. He said flipping was one of the riskiest strategies in investing. Since I flip a lot, that got my attention.
The reason it’s so risky is because of the financial liability involved in taking on mortgages to do the deals. For example, if you have five flips going at once, and the market tanks, you’ll have five mortgages to pay back with negative house values to pay them back with.
We compared three investment strategies, including being conservative, being steady with a realty business or taking risks with flipping. Emmett pointed out that you need all three of these components in your investing strategy and your portfolio.
Consider the following verse from the Bible from the book of Proverbs 27: 23-27.
“Know well the state of your flocks and set your heart to your herds. For riches are not forever, nor a diadem to all generations. Grass vanishes, and new grass appears, and the vegetation of the mountains are gathered in. The lambs are for your garments, And the goats for the price of a field; And goats’ milk enough for your food, for the food of your household, and sustenance for your girls.”
Solomon was one of the richest and wisest men who ever lived. And if you read the book of Proverbs with a business mindset, you’ll be surprised at the things Solomon put in his writings that apply today.
In this passage, He spends the first sentences talking about how markets go up and come down. “Grass vanishes, and new grass appears.” He goes on to suggests that your portfolio (your flock) needs to be diversified.
For real estate investors, that means your houses and notes need to have a specific purpose.
Let’s examine “Lambs… for your garments.” I would suggest that this is the part of your portfolio you hold very close, like your first paid-for rentals. These are the ones you’re most conservative with because they are your safety net.
“Goats for the price of a field” could represent the risky things you do, like flipping a house. But if the profit from that risk is used to pay down on a rental, your safety net grows.
Finally, “goats milk… for the food of your household.” This is the business that you use to pay for the everyday things. In this case, it was a realty business. It could also be running a property management company or just using the cashflow from notes and mortgages you own for personal consumption. Either way, milk is a resource that must be collected daily.
By listening to Solomon and breaking your portfolio up into these three areas, you will ensure your flock continues to thrive.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.