Ramblings on Investing for the Solopreneur: Part 1

Does the Solopreneur even want to make traditional investments?
I think ‘traditional’ investing is an interesting topic to take a mini dive into for the solopreneur as although I believe this personality type will be interested in the $ and wealth generation aspect, something like (‘only’) ~7% annual returns on capital locked away is probably not going to satisfy the sense of urgency and appetite for risk and novelty that this person might have. I know it’s something I always scoffed at over the years. Through some life learnings I discuss , I’m (slightly) more ‘patient’ nowadays and have a bit of a longer-term view on things. As the old saying goes “it’s about time in the market not timing the market”, and as John Bogle famously says “Don’t do something, just stand there”. I titled this post ‘part 1’ as the below will mainly be in relation to property investment and I plan to put something out at a later stage with more coverage on other forms.

Over the years I always looked at money I spent within my business, or turned over in Poker cash games, or spent on personal development etc as the ‘investment’ activities I participated in (which they absolutely are), but never had the patience or much of a #skininthegame context from a more ‘traditional’ (stocks, properties, etc) standpoint.

As an update to this I have recently started dabbling into some ETF’s which is going well so far over a short sample size. Regardless of the small sample this is definitely feeling a lot more responsible than previous immature strategies embarked on such as spinning the wheel on ASX penny stocks or searching for hundredbaggers punting on scam ICO’s.

I’ve done varying amounts of ‘research’ into investing over the years but in early 2020 I did a pretty deep exploration into specifically property investment. The voice I found in this space that finally resonated with me and I felt I could ‘absorb’ was Michael Yardney’s, where he seems to have a knack for explaining things in a simple, concise, no nonsense way without missing anything important (a seemingly difficult combination to achieve). I also want to note that although it was specific to property, I think the learnings are applicable across all investing activities.

I didn’t end up taking any action at the time which may disappoint some, although I did feel somewhat validated by this non-action when I later read the Psychology of Money by Morgan Housel where talks about an independence > $ maximisation ideology which reasonably works for him, although maybe not the most rational approach. As a note to self, I’ll need to make sure I don’t use things like this just to confirm bias or re-assure chosen actions.

Are you educated, Patrick?
As a whole I actually found this property investing exploration quite concerning as I’ve completed finance units at university (with good grades) which I’m certain would be considered greater ‘financial education’ than the average, yet there are so many concepts which now seem ‘simple’ to me that I either had no idea about or didn’t have my head around (always still more learning to go). Why I find this concerning is I’m aware of the actions that would have been available to me (borrowing x amount to purchase y etc) with unsatisfactory knowledge or understanding of what things meant, what would actually be going on in the background, and how all the moving parts worked.

I again have to thank Michael here (the brownnosing will stop shortly) as I actually initially reached out to him in early 2019 ready to take action, where he promptly responded enquiring on whether or not I was educated in the domain, to which he discovered I wasn’t and pointed out that this was step 1. I should have ‘taken a leaf out of my own book’ from the get-go, as I talk about the importance of garnering a good level of understanding regardless of whether a task is outsourced .

I then read 3 of Michael’s books — ‘Rules of Property’, ‘How to Grow a Multi-Million Dollar Property Portfolio’, and ‘What Every Property Investor needs to know about Finance, Tax, and the Law’, along with listening to a few of his podcasts on Spotify before writing a longer note to him. I thought about including the letter in entirety for this post, but it’s a bit long-winded and boring so what I’ll do is maybe include some of the questions I asked along with attempting to summarise what I believe to be some of Michael’s approach. Writing this post will probably be more helpful to me than it is to you (fine with me!), and I should note that I could very well be wrong with anything I say… this is just how I’ve interpreted things personally and questions or trains of thought that I think are relevant. Please do your own research.

Strategy interpretation summary
As noted above these are interpretations and I’m not double-checking quotes etc so this shouldn’t be considered what the actual teachings are, check them out for yourself.

From what I’ve picked up there are two strategy paths to build wealth in property investing, 1 being — Positive Cash Flow, 2 being — Capital Growth. Michael advocates for the Capital Growth path. He has a 6 point strategic checklist approach (I believe it started out as a 5 point checklist than expanded) for choosing properties that will have this strong Capital Growth or be of ‘Investment Grade’. Off the top of my head the inclusions on the checklist are along the lines of — owner occupier attractiveness, proximity to CBD or water, something to do with not being a new build, good land to asset ratio, has some sort of ‘twist’, and an ability to manufacture capital growth. While the checklist won’t be 100% transferrable to other traditional investments, I do look forward to building my own mental model framework of sorts which I imagine will be similar for my decision making in other forms of investing.

Interestingly it seems that ‘investment grade’ properties meeting the 6 point criteria will more than likely be negatively geared, and that positively geared properties (such as high-rise apartments) generally don’t perform too well from a capital growth standpoint. I will need to dive deeper on the ‘why’s’ here.

One of the biggest reasons Michael advocates for property over say shares is due to leverage. In property you might be able to outlay as little as say ~20% of the property value (maybe less) yet be earning capital growth on 100% of the property price… in shares you would only be earning capital gains on the amount you’ve invested. You will obviously need to factor in the interest charge on borrowed money applicable to property here among other costs or fees that might pop up.
Some further learnings which I’ll gloss over but will hopefully highlight more important things to be thinking about are — what will determine your creditworthiness, order of lenders you use (maybe target tougher ones initially, then easier ones for subsequent property purchases), what your loan to value ratio might want to look like depending on what stage or phase of your investment journey you’re on (are you in the asset accumulation phase, cash flow phase), what’s your ownership structure, estate plans etc.

Questions I asked in my letter
As mentioned above please some snippets of actual questions I asked in the note.

Who’s borrowing the mortgage? — I was curious as to whether this would be myself, a company, or an SMSF, definitely a relevant question and before diving into material I would have assumed (and am guessing most would) that the only answer to this question would be the individual. This still could still be the correct answer for my situation but wanting to check or find out I believe shows a nice step forward.

What structure am I purchasing or owning in? — I assume this more than likely has to be the same answer as the above question but again something I would have never thought about. While I still need to learn more, I now know enough that all different structures available will be subject to different types/levels of protection, different tax rules, different rules around passing on wealth in the event you die etc. Again, I think asking the question is a nice step forward rather than assuming.

Am I launching my investment business as an owner-occupier or rent-vester? A rent-vester being someone who rents where they live but owns an investment property that is being rented out. Definitely a relevant question. I talk about my current lifestyle in the letter and how I think rent-vesting is more suited to that lifestyle, but I’d be interested in assessing further to see what the ‘rational’ answer would be.

How many purchases at launch? — Was maybe a little audacious of me to ask this question but I think its relevant to include that it was asked due to Michael always advocating for a quality > quantity approach. He often says something along the lines of preferring to own 1 x quality shopping centre rather than 10x crap properties (paraphrase). I believe he also talks about the importance of getting the first purchase right for your investment career and how smoother this can make the rest of the journey.

Knowledge gap — Pyramiding — I mentioned a knowledge gap and was seeking further clarification in this concept which has to do with using equity in current properties as collateral or deposit for further financing/property investment purchases. Eg not requiring further ‘cash’ deposits.

Other — Personal situation — Everyone’s situation is unique so I go into a bit of detail on mine in the note outlining some points that might be relevant as I attempt to determine what my unique individual optimal strategy might be.

In closing — I hope that by writing this post it helps cement some of the things I’ve learnt, reminds me that there is still infinite more to learn and to always be studying, reminds me to keep playing long term games, reminds me of my knowledge gaps, reminds me of questions I need to be asking, helps me clarify what I want and how I want to approach investing, and reminds me to get the right assistance and build the right team around me when certain situations or opportunities arise.

Happy Investing!

Originally published at https://www.patrickconnolly.me.