A good investment has 5 qualities, not all investments have all 5, but the best ones do. Surprisingly, one of the five is not a good return. A good return is the foundation (go and read our post on that) if the foundation of a good investment isn’t there you shouldn’t even be evaluating if it’s a good investment (hint: it’s not), but here we’ll assume the return in there and we’ll address what other characteristics you should be looking for.
As you probably know, we’re pretty high on real estate so we will also specifically talk about how an investment in real estate satisfies each of the 5 pillars of a good investment while showing how some other common investments don’t qualify.
So what are the 5 pillars? A good investment should be predictable, reliable, give you control, provide protection against inflation, and be liquid. Let’s dive into what each of those means and looks like in the real world.
Predictable
First, a good investment should be predictable. You should know HOW MUCH money is coming in and WHEN it is coming.
With real estate when you have a rental with a lease you know how much income you should have coming in each month. In crunching the numbers you should factor in vacancies and repairs so you have a really good idea of how much cash you can expect each month.
If you invest in stocks you might have an idea of when you’ll get dividend payouts, but no one can accurately predict when stocks will rise or fall and by how much. Stocks would not meet this first criteria.
Reliable
Second, a good investment should be reliable. Your investment should continue to produce long-term through just about any situation.
With real estate regardless of the state of the economy people will always need a place to live. In fact, during a recession rents tend to rise. If something happens to your property (like if it burns to the ground) it’s insured, that means you won’t lose your money, but can recoup your investment cost.
If we look at an investment in crypto it’s easy to see that it fails the reliability test. I invested in crypto in 2018 and doubled my investment by the time I cashed out in 2019. For all of you that invested in crypto in 2021….well your story is probably a little different. Crypto is way too volatile to be a reliable investment.
Control
Third, a good investment should give you a degree of control. You should be able to do things that influence how your investment performs.
With real estate one of the easiest ways to increase the return is to improve the management. Improve the property, decrease your expenses, or increase rents. Doing any of those can drastically improve the performance of your real estate investment.
Stocks, crypto, bonds, t-bills you have no control over any of these investments. Unless you have massive wealth you cannot individually affect your investment in any of these vehicles.
Inflation Protection
Fourth, a good investment should protect you against inflation. The value of the asset should adjust with inflation. If inflation skyrockets, so should the value of your asset.
With real estate the value of your asset will appreciate over time and should AT LEAST keep up with inflation. Now, you need to do some market research, but finding a property that doesn’t at least keep up with inflation is pretty hard.
Over the past few years we’ve seen massive inflation and we’ve seen relatively few investments that have protected investors against inflation. Stocks failed. Crypto failed. Oil failed.
Liquidity
Fifth, a good investment should provide some degree of liquidity. Your investment should put cash in your bank account that is easy to use for life.
With real estate your monthly cash flow puts money into your bank account every month! You are then free to use that money or to save it, the important thing is that it is up to you!
If you invest in a company you can meet a lot of the other pillars for a good investment, but the average start-up takes 7+ years for a liquidity event. That’s a long time to actually get your money back.
Very few investments will meet each of the 5 pillars of a good investment. Sometimes you’ll value one pillar over another, but for the average investor you should be looking for an investment that meets the 5 pillars of a good investment. There really is nothing as good as investing in real estate. It’s the most well rounded and robust investment out there.
Your real estate coaches,
Dallas & Greg
