Whether you are an apartment operator or a passive investor, it is wise to know the basic two goals of money management. Such an understanding should allow for more effective decision making and identification of risk.
1️⃣ Capital Preservation
Capital Preservation simply refers to protection of capital. This identifies the goal of protecting principal and not losing money on the investment. Warren Buffett’s famous statement sums up investing wisdom: “Rule Number One: Never Lose Money. Rule Number Two: Never Forget Rule Number One.”
While not the most attractive part of investing, capital preservation is the most basic. Protect the principle always. It is easy to be attracted to the idea of making quick money, but the reason the wise say that wealth is built over time (and not overnight) is because wise wealth building strategies are built around protecting principle and do not seek exorbitant returns at the potential expense of principal.
For those who seek to passively invest in real estate, a great example would be not to simply invest for the highest IRR advertised by the operator, but look for the fundamentals: growing markets, rent growth potential, conservative underwriting, etc. While the IRR may not be as high, rule #1 has been followed. Now for the second goal.
2️⃣ Capital Appreciation
This is the goal that comes to mind to most of us as the primary investment objective. After the first goal of not losing money, the second is to create wealth through generating returns on that initial investment. It is this goal that attracts people to investing and creating passive income. in real estate investing, capital appreciation involves the passive income from rental collections as well as the wealth created from the potential sale and refinance of the property. This is where the returns are generated for the operator and his or her investors.
💡Remember The Order
We think about wealth creation, but that only comes second to protection of principle. Passive investors should be careful not to put the principle at risk for larger returns. The goal of investing is to get your capital back and more and repeat the process again. Not protecting capital in the first place is a great way to get put out the game forever. These two goals of investing and the order they represent is what separates the investor from the gambler.
